According to data by the State Administration of Foreign Exchange (SAFE), on June 7, China’s foreign exchange reserves reached 3,127.8 billion dollars as of May. China’s official media said this aims to enhance the ability to fight with the West.

Compared to April, this amount increased by 8.1 billion dollars or 0.26%.

China News Weekly published an article on June 6 asking whether China needs to maintain such a scale of forex reserves.

The author rejects the recent proposals by some scholars to accelerate the de-dollarization, sell U.S. debt on a large scale and increase gold reserves to deal with the risk of international sanctions.

The reasons are as follows.

First, substantial forex reserves ensure China’s regular operation in trade payment and settlement.

Second, the current status of the China yuan or RMB as an international payment settlement and reserve currency is still not high.

Third, the article wrote that de-dollarization and a substantial increase in gold reserves are not only challenging to operate but also may lead to deflation, causing greater damage to the economy.

Lastly, Russia has adopted measures such as oil and gas exported to the EU must be settled in ruble. However, the approach is not effective in joint sanctions from Europe and the U.S.

In the future, if Europe and the U.S. sanction China, they will also face unbearable losses because the investment assets of these two regions in China are huge.

The article concludes that maintaining huge foreign exchange reserves enhances the ability to fight, forming a “lose-lose battle” if it is hit by sanctions from the West.

According to Wen Bin, chief researcher of Minsheng Bank, the rebound of forex reserves in May mainly comes from the increase in valuation. As regards the exchange rate, the U.S. dollar index fell slightly after rising to a high in the middle of May. That means non-U.S. dollar currencies appreciated against the U.S. dollar.  

Wang Chunying, deputy director of SAFE and spokesmen, explained that U.S. dollars dominate the forex reserves, and the amount of non-U.S. dollar currencies converted into U.S. dollars increases. Combined with factors such as fluctuations in asset prices, the scale of foreign exchange reserves grew in May.

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