China‘s foreign exchange reserves rose by $3.5 billion in August to $3.1072 trillion. Economists polled by Reuters had expected that reserves would fall from July. The increase in August suggested China is doing better than expected at hedging against financial risks.
On August 5, the yuan slipped past the key psychological level of 7 per US dollar for the first time since 2008, spreading panic in the market. One month later, the yuan maintained overall stability without the support of the government, with the central parity rate standing at 7.0855 on Friday. The risk of a free fall is declining, and people‘s confidence is returning. The increase of foreign currency reserves added to evidence of a solid economic base in China.
After the yuan plunged beyond 7 per dollar, the US accused China of being a currency manipulator. This came amid growing fears that trade tensions between China and the US could escalate into a full-scale currency war. Despite the increased pressure, the Chinese authorities have maintained foreign exchange reserves at a stable level of about $3.1 trillion. China still has the largest foreign exchange reserves in the world. That‘s why China can show great tolerance toward external economic pressure and threats.
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China‘s massive foreign exchange reserves offer the country more leeway to adjust its position amid trade tensions with the US. China will fight to the end to defend its interests, but won‘t only be playing defense. Flexible measures can be put into place to fight back.
One available option is to diversify its investment out of US dollar assets to reduce financial risks amid the trade tension. Japan reportedly surpassed China as the largest foreign holder of US Treasuries in June. If the US makes the financial market a battleground, it‘s possible that Chinese holdings of US government debt will continue to decline in the coming months.
China can also use its vast foreign exchange reserves to support the Initiative (BRI). China‘s trade with countries along the BRI routes has seen a faster-than-average growth rate in the past few years. Along with the development and promotion of the BRI, China can reduce its dependence on the US markets and gain the initiative in its relations with the US.
The author is a reporter with the Global Times. bizopinion.cn