In December 2021, China's foreign exchange reserves reached the highest value in nearly a year. However, after entering 2022, China's foreign reserves continued to decline for three consecutive quarters. Although there were minor increases on a monthly basis, the quarterly data still showed a significant decline. Finally, in the fourth quarter of last year, China's foreign reserves not only increased on a quarterly basis but also grew continuously for three consecutive months on a monthly basis. The continuous decline in foreign exchange reserves was finally interrupted, and a rebound occurred. Where does the reason for the successful rebound lie?
01. Relevant Factors
The key element that determines whether China's foreign exchange reserves are more or less is the trade surplus. Last year, China's trade surplus continued to expand throughout the year, which brought a continuous increase in foreign exchange reserves. Under these circumstances, why did our foreign exchange reserves decrease instead? The main reason comes from the following price factors.
The price factors affecting foreign exchange reserves are related to exchange rates and the price levels of various assets included. In December, the US dollar index fell, and the non-US dollar assets in foreign exchange reserves correspondingly rose during currency conversion.At the same time, however, due to the large amount of bonds from various countries in the foreign exchange reserves, and coinciding with the general decline in bonds of these countries in December, this has led to a devaluation of bond asset prices and a reduction in foreign exchange reserves.
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Comparing the bond yields of various countries in December, we find that when comparing the beginning and end of the 10-year bond yields, the United States, the Eurozone, Japan, and the United Kingdom all experienced an increase, which means that the bond prices in these four major economies have all fallen.
Under the influence of the above factors, China's foreign exchange reserves still increased by $10.2 billion in December on a month-over-month basis, mainly due to the increase brought about by the trade surplus.
However, we also need to pay attention to the fact that in November, China's foreign trade exports decreased year-on-year, which may imply that China's trade surplus will narrow to some extent in the coming period.
02, Better than the global situation
Nevertheless, compared with the overall global situation, it still shows that the stable growth of China's foreign exchange reserves is very significant.
In the first three quarters, China's foreign exchange reserves were also generally declining, but the decline was far lower than the average.
Data shows that in the first three quarters of this year, the global foreign reserves decreased by $1.3 trillion, with a drop of more than 10%, a proportion higher than the decline in China's foreign reserves.
The lesser reduction in China's foreign exchange reserves is also related to China's continuous optimization of the structure of foreign reserves.
At the end of 2021, China once held U.S. debt up to $1.0808 trillion, but the latest figures show that our holdings of U.S. debt have dropped to less than $910 billion.Due to the data from the U.S. Department of the Treasury, which is currently only updated through October of last year, there is reason to believe that by December, our country's annual reduction in U.S. Treasury holdings will far exceed $170 billion.
After selling $170 billion worth of U.S. Treasury bonds, the corresponding loss from the devaluation of this portion of U.S. debt was avoided.
Last year, U.S. Treasury bonds experienced a significant decline, with the U.S. Treasury Composite Index falling by as much as 18%. This would have certainly resulted in some losses for us, who held over $1 trillion in U.S. debt at the beginning of the year. Fortunately, the continuous reduction of U.S. debt holdings throughout the process minimized the losses to the greatest extent possible.
It is evident that the U.S. dollar cannot continue to raise interest rates indefinitely. With the sustained suppression, as the future rate hikes decrease or even cease, our country's foreign exchange reserves will continue to increase further.
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