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Chinese Yuan Rises As New Loans Seen at Five-Month High, Forex Reserves Jump

July 8, 2019 at 16:28 by Andrew Moran

Various yuan banknotesThe Chinese yuan is strengthening to start the trading week as new economic data lifted the currency against several major rivals on Monday. As Beijing begins a trade truce with Washington, foreign exchange reserves were better than expected, which also coincides with new loans expected to surge to their best levels in five months.

According to the People’s Bank of China (PBOC), forex reserves climbed $18.23 billion last month to $3.119 trillion. The market had anticipated that the world’s largest reserves could jump just $2 billion to $3.103 trillion. The nation’s foreign exchange regulator, State Administration of Foreign Exchanges (SAFE), said that the big increase was due to changes in currency conversion rates and asset prices.

That said, forex reserves might dissipate in the coming months as the PBOC could mirror the Federal Reserve and start slashing interest rates to support growth.

Outflows have held steady since the government imposed tougher capital controls following the economic downturn in 2015 and 2016. Should the yuan breach the 7 mark against the US dollar, then analysts believe greater capital controls could be installed to mitigate damage.

Moreover, gold reserves increased from $79.83 billion in May to $87.27 billion in June.

China is expected to report new bank loans rising to its best levels since February, a new Reuters survey of economists shows. Financial institutions were projected to provide $246.92 billion in net new loans in June, up from around $200 billion in May. It should be noted that the China Banking and Insurance Regulatory Commission (CBIRC) expects a weaker reading of under $200 billion.

But, if the median estimates are accurate, then they are still below the $250 billion or so from the same time a year ago. Beijing has been maintaining a healthy supply of liquidity in the banking system to stimulate the economy and offset the consequences from the US trade spat.

Last week, Premier Li Keqiang told the World Economic Forum that the reduction in reserve requirement ratios is prompting banks to take advantage. This has led to increased bets of additional monetary policy easing in the coming months.

In other data, vehicle sales, inflation, and trade numbers are scheduled for release this week.

The USD/CNY currency pair fell 0.17% to 6.8819, from an opening of 6.8936, at 16:01 GMT on Monday. The EUR/CNY tumbled 0.34% to 7.7129, from an opening of 7.7391.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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