Strong Yuan Helps Boost China's August Forex Reserves

     BEIJING (MNI) - The strengthening yuan pushed China's foreign-exchange

reserves to their seventh straight monthly rise in August.

     Foreign-exchange reserves increased $10.81 billion during the month to

$3.0915 trillion, the highest level since last October, although the increase in

August was less than the $23.93 billion rise in July.

     "In August, cross-border capital flows remained stable, and the supply and

demand of foreign exchange continued to be generally balanced," the State

Administration of Foreign Exchange (SAFE) said on its official website on

Thursday.

     The valuation effect contributed to the rise, SAFE said.

     "In the international financial market, asset prices rose, pushing up the

scale of forex reserves overall," SAFE said.

     In addition to the valuation effect, capital inflows also contributed to

the increase in forex reserves.

     "We estimate that bond price rises brought a $5 billion to $8 billion

increase in forex reserves, and capital inflows contributed $3 billion to $5

billion," Liu Jian, senior analyst at Bank of Communications, said on Thursday.

"This is probably the first time in a long time that capital inflows have had a

positive effect on forex reserves."

     The positive capital inflows were largely caused by a surge in the yuan's

value in August. The yuan traded at 6.5969 versus the U.S. dollar at the closing

on Aug. 31, strengthening from 6.7290 on July 31.

     "When the yuan went stronger to below 6.7 against dollar, some investors

who had previously shorted the yuan went long on the yuan, and corporates became

more willing to sell dollars, causing net capital inflows to rise," Liu said.

     Forex reserves could have risen even more in August, but the People's Bank

of China chose not to roll over its forward contracts, which stymied the rise

somewhat.

     "In the past, the PBOC intervened in the spot market to prevent the yuan

from falling by selling dollars. But to prevent forex reserves from falling too

much, it decided to use forward contracts to postpone the actual selling of

dollars," a Shanghai-based forex trader told MNI. "But recently the situation

has been good, so the PBOC decided not to roll over the contracts but to close

the forward positions by selling dollars, causing forex reserve to fall to some

extent."

     SAFE expects the forex reserve situation to remain stable in the future.

     "As the Chinese economy will remain stable, tending toward positive, and

the financial regime reforms will deepen and the financial sector will open up

further, the foundation for stable cross-border capital flows will be even

firmer," SAFE said. "That will push the scale of forex reserves to remain

reasonable and moderate."

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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