File photo shows a teller picks a dollar bill among banknotes of U.S. dollar and renminbi (RMB) at a bank in Linyi, east China's Shandong Province, July 22, 2011. [Photo/Xinhua]

China's foreign exchange reserves will likely see a moderate increase this year amid improving export growth and recovering capital inflows after hitting a two-year high in December, experts said on Monday.

Meanwhile, the country's official reserves in gold surged by the largest amount in eight years in 2023, a trend experts said is likely to continue as the country further diversifies its reserves away from dollar-denominated assets and capitalizes on rising gold prices.

Their comments came after the State Administration of Foreign Exchange said on Sunday that China's foreign exchange reserves reached $3.238 trillion as of the end of last year, the highest since December 2021, while gold reserves rose for the 14th consecutive month.

The country's foreign exchange reserves were up $66.2 billion, or 2.1 percent, compared with the end of November, the administration said, attributing the rally to a weakening US dollar and rising global financial markets. A softer dollar means that reserves denominated in other currencies become more valuable in dollar terms.

For the full year of 2023, China's foreign exchange reserves rose by $110.29 billion, the biggest increase in six years, compared with a $122.5 billion drop in 2022.

Guan Tao, global chief economist at BOC International, said the country's foreign exchange reserves climbed last year as the US Federal Reserve slowed monetary tightening and made the US dollar weaker amid fluctuations.

Guan, who is also a former head of the administration's Balance of Payments Department, said the rise in reserves has fortified China's ability to cope with external uncertainties, with the country's foreign exchange reserves equivalent to about 15 months of its import payments, well above the international red line of three to four months.

Liu Chunsheng, an associate professor at the Central University of Finance and Economics, said the increase also reflects the resilience of the Chinese economy, with the country's exports having resumed positive growth in November despite lukewarm global demand.

China's foreign exchange reserves will likely further rise this year while remaining overall stable, as the domestic economic recovery strengthens and the US Fed is poised for interest rate cuts, which may propel capital flow into China, Liu said.

The nation saw the resumption of net foreign capital inflow into securities in November, when foreign investors purchased a net $33 billion in onshore bonds, the second-highest on record, data from the administration showed.

Meanwhile, China's official gold reserves reached 71.87 million ounces at the end of December, up from 71.58 million ounces a month earlier. In 2023, the country's gold reserves were up by 7.23 million ounces, the biggest increase since 2015, according to the administration.

The official gold reserves may further increase as the country diversifies reserve assets, said Wang Youxin, a senior researcher at the Bank of China. "The US government debt problem will further evolve in 2024, making gradually cutting the proportion of US debt in reserves conducive to reserve asset safety."

Zheng Houcheng, chief macroeconomist at Yingda Securities, said that China may continue to boost holdings in gold reserves in the first half of the year, as global gold prices may further rise with the US dollar weakening.

At its annual work meeting last week, the administration emphasized that it will improve the management of foreign exchange reserves to ensure the security and liquidity of reserve assets, as well as to preserve and increase the value of these assets.

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