Recently, the decline of China's foreign exchange reserve balance is mainly affected by valuation factors. We should avoid equating the decline of foreign exchange reserve with the foreign exchange intervention of the central bank, capital outflow or operating loss of foreign exchange reserve.
Since 2022, the scale of China's foreign exchange reserves has decreased successively, with a cumulative decrease of US $130.5 billion in the first four months. This is mainly due to the negative valuation effect caused by the weakening of non US dollar currencies and the decline of global asset prices. Affected by this, foreign exchange reserves of many countries also declined in the same period.
The impact of the periodic decline in the balance of foreign exchange reserves is limited. We should avoid three misreading of the changes in foreign exchange reserves. First, we should avoid equating the decline in the balance of foreign exchange reserves with the foreign exchange intervention of the central bank. The data of bank settlement and sales of foreign exchange and foreign exchange in the first quarter showed that the foreign exchange market was still oversupplied, and the foreign exchange share of the central bank continued to increase.
Second, we should avoid equating the decline in the balance of foreign exchange reserves with capital outflows. Although foreign capital reduced its holdings of RMB assets in the first quarter due to the spillover of geopolitical risks, the tightening of the Federal Reserve and the rebound of China's epidemic, the preliminary balance of payments data showed that the ratio of China's net short-term capital outflow to the basic balance of payments surplus decreased year-on-year, and the short-term capital outflow was perfectly hedged.
Third, we should avoid equating the decline in the balance of foreign exchange reserves with the operating loss of foreign exchange reserves. In the first quarter, the increase of foreign exchange reserve assets caused by China's transactions was much greater than that of the central bank's foreign exchange share in the same period, mainly reflecting the provision of operating income of foreign exchange reserves.
It is expected that the scale of foreign exchange reserves will still show normal fluctuations with ups and downs in the future. With the increase of RMB exchange rate elasticity, it can better become a shock absorber to absorb internal and external shocks. The adaptability and tolerance of market players to exchange rate fluctuations are also significantly enhanced, and the dependence on foreign exchange reserves should be reduced in the future. Moreover, in terms of relative scale and adequacy indicators, China's foreign exchange reserves are still abundant, so there is no need to pay too much attention to the temporary rise and fall of foreign exchange reserves.
Risk tip: the monetary tightening of major overseas central banks exceeded expectations, and the development of geopolitical situation exceeded expectations.
