(Yicai Global) Aug. 8 -- The yuan might be struggling against the dollar, but China is not using a significant amount of its foreign reserves to intervene with exchange rates, according to the former director of the State Administration of Foreign Exchange.
General market consensus was that the weakening yuan would see a decline in forex reserves last month, but they actually rose, Guan Tao told Yicai Global. Factoring in currency valuations, July's USD5.8 billion gain in reserves was relatively small and suggests that cross-border capital flow is stable, he added.
China's forex reserves closed in on USD3.12 billion at the end of July after gaining for the second straight month, according to data released yesterday by the People's Bank of China.
"Overall, the dollar index [which measures the greenback against a basket of currencies used by the United States' biggest trading partners] did not fluctuate significantly and hovered between 94 and 95 in July," said E Yongjian, chief analyst at the Bank of Communications' financial research center.
"Neither the euro, the yen or the pound changed substantially against the dollar, meaning exchange rate-related factors had a limited impact on foreign reserves, he added, saying the yield on 10-year US Treasury bills edged up over the period and bond valuations had a slightly negative impact on the reserve figure. He believes a higher foreign currency stockpile suggests that cross-border capital movements are stable and that there was a net inflow in July.
No Forex for PBOC
China's central bank for the most part now refrains from making routine interventions in the currency market, according to Sun Wei, a deputy general manager at China CITIC Bank's financial markets department. During the most recent weakening of the yuan, the government and other parties have taken action on a limited scale compared with the last time the redback depreciated, he added.
The central bank decided earlier this year to deactivate its 'counter-cyclical factor' when determining the yuan's central parity rate pricing mechanism, in line with the neutral forex policy, Sun said. The yuan has weakened quickly against the dollar since mid-June, passing a number of psychological anchors, he added, saying the exchange rate formation system has remained unchanged, and the market has been the primary determiner of exchange rates.
Zhen Mei, general manager of global markets at Bank of China, agreed. Market-based fluctuations made rates much more elastic and allowed foreign exchange to act as a buffer in international payment regulation, she added.
"Factors such as steady national economic growth, a maturing domestic financial market, accelerated opening up of the financial market and balanced international payments created [favorable] conditions for the market to play a decisive role in exchange rate formation," Zhen said.
Editor: James Boynton