China's foreign exchange reserves dipped to the lowest level since December 2011 last month, central bank data showed on Tuesday, as a stronger U.S. dollar caused valuation loss.
The reserves fell by 27.9 billion U.S. dollars from April to 3.1917 trillion U.S. dollars in May, ending two months of increases, according to data from the People's Bank of China (PBOC).
Analysts said the fall was not worrying, attributing it to the valuation effects of the dollar appreciation. The drop "shouldn't spark fears of fresh yuan weakness and capital flight," said Bloomberg chief Asia economist Tom Orlik.
Though the May reserves ended below an expected level of 3.2 trillion U.S. dollars, valuation adjustments accounted for virtually the entire decline, Orlik said in a research note.
Both the euro and the Japanese yen, which are included in the currency composition of China's reserves, fell against the dollar due to increased expectations for a U.S. interest rate hike.
China began to see a falling trend in its forex reserves in November 2015 due to concerns over a weak yuan and capital outflow, but the reserves returned to growth in March as fears eased amid signs of stabilizing economic growth. Capital outflow pressure actually eased in May, according to an analysis note from Guotai Junan Securities.
It explained that while forex reserves shrank in dollar terms, their value denominated in Special Drawing Rights (SDR), an international reserve asset, rose instead. China's forex reserves were valued at 2.2751 trillion SDRs in May, up 3.5 billion SDRs from the previous month, PBOC data showed.
Several factors reduced the pressure of capital flight, including China's economic growth holding steady and signs of the central bank not targeting a competitive devaluation, Orlik said.
In addition, market expectations over the yuan's exchange rate turned more rational, making capital flow less susceptible to the currency's fluctuations, according to Guotai Junan Securities.
China's official gold reserves stood at 70.48 billion U.S. dollars in May, down from 74.75 billion U.S. dollars in April, the PBOC data showed.
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