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Iris Pang, an ING Economist, spots increase in China’s foreign reserve to forecast nearly 3-4% increase in the dragon nation’s Gross Domestic Product (GDP).

Key Notes:

  • China’s foreign reserves have only edged down slightly in one month this year (April). In  June, reserves increased by another US$18.23 billion to US$3119.23 billion, the largest monthly increase this year.  
  • China has been very closely monitoring  capital outflow transactions, which helps explain the low net outflows in 2019. But this is only one side of the story. Another is the weak dollar: This increases the USD holdings of other currencies  and therefore raises the value of China’s foreign reserves. This could be increased further as China has shifted to greater non-USD holdings in its FX reserves this year.  
  • A more important factor is the inclusion of China assets in global benchmark indices.
  • The  IMF estimated  that equity and bond funds, passive and active, will create inflows of as much as  $450 billion into China in 2019-2020, which is equivalent to 3%  to 4% of GDP.
  • These actions make  net inflows rather than net outflows more likely to happen  for the rest of  2019, and possibly on  into 2020.