China Foreign Exchange Reserves Drop to $3.18trn

China Foreign Exchange Reserves Drop to $3.18trn

Amidst gold buying, China’s foreign exchange reserves posted at $3.18 trillion at the end of May, down 0.88% from a month earlier, the State Administration of Foreign Exchange reported on Wednesday.

The state administrator attributed the decrease in foreign exchange reserves to the combined impact of fluctuating currency exchange rates and changes in asset prices.

China foreign exchanges are heavily made up of US dollar assets, including US Treasuries. If the market price of US Treasuries should decline, for example, due to a rise in interest rates, then the value of China’s foreign exchange reserves could also decline.

China is by far the largest holder of foreign exchange assets in the world, followed by Japan, Switzerland, India, Russia, and Taiwan. Foreign exchange reserves are assets denominated in a foreign currency, generally cash or government bonds, that are held by a nation’s central bank.

Most foreign reserves are held in US dollars or euros, although gold can also be treated as a reserve. In general, nations accumulate foreign exchange reserves through international trade surpluses, although repatriated offshore earnings of domestic companies, or offshore worker remittances, can also feed into foreign exchange reserves.

In general, many nations accumulate foreign exchange reserves as a cushion against unexpected economic troubles or downturns. The foreign exchange reserves can help ensure that a central government agency has the cash necessary to fund the national government, pay for imports, or to stabilize a currency.

For example, if a nation’s currency is faltering, the central bank can step in and spend foreign exchange reserves, usually dollars, to buy back their domestic currency. The increased demand for domestic currency will relatively boost its value.

Although the size of China’s foreign exchange reserves declined modestly during May, the nation’s “economic operation continues to recover well, which is conducive to the continued stability of foreign exchange reserves,” said the State Administration of Foreign Exchange.

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