China's May Foreign Exchange Reserves Surge Significantly, Cross-Border Capital Flows Stabilize

Overview

JPMorgan Chase's latest report points out that China's May foreign exchange reserves increased significantly by $31.7 billion to $344.22 billion, exceeding market expectations. This growth may benefit from export performance better than expected and import slowdown, while the RMB exchange rate strengthened and capital outflow pressure continued to ease. The report also emphasizes that recent cross-border regulatory measures aim to clean up illegal activities and guide funds towards compliant channels, rather than comprehensively tightening capital outflows.

Core views

Foreign exchange reserve growth exceeded expectations: May foreign exchange reserves grew by $31.7 billion to $344.22 billion, higher than the expected $340.5 billion (consensus was $340 billion). This growth may stem from exports better than expected, especially price increases in 'new three items' such as AI chips, new energy (EVs, solar, batteries), and import decline. RMB Exchange Rate Strengthening and Capital Flows: The RMB exchange rate CFETS index rose about 1.5% in May, and the Real Effective Exchange Rate (REER) increased about 1%. At the same time, corporate and individual settlement and sales willingness weakened, bank settlement rate dropped from 58.2% in March to 50.2% in April, and sales rate also dropped from 55.0% to 49.8%, leading to a narrowing net settlement ratio, indicating that capital outflow pressure has eased. Central Bank Operations and Asset Allocation: The People's Bank of China accelerated gold purchases in May, with gold purchases reaching 0.32 million ounces, far higher than the average of 0.03 million ounces in the second half of 2025. At the same time, US Treasuries held by China decreased by $41 billion in March to $652.3 billion, showing some adjustment in asset allocation. Cross-Border Regulatory Policy Interpretation: Although the market worries that China may tighten capital outflows, the report believes that relevant policies are mainly to strengthen the enforcement of existing rules, rather than introducing new restrictions. The 'Regulations on the Administration of Outbound Investment' issued by the State Council aims to establish a more perfect governance system, supporting high-level opening up while safeguarding national security and investor rights. The policy focus is on cracking down on gray area operations and guiding funds to flow through compliant channels, rather than comprehensively prohibiting outbound investment.

Analysis framework

The report evaluates China's macroeconomic and policy trends by analyzing foreign exchange reserve changes, exchange rate trends, import and export price effects, central bank asset allocation, and cross-border capital flow data. First, based on the unexpected growth of foreign exchange reserves, it infers an expansion of trade surplus or improvement in capital flows; second, it observes changes in market entity behavior through settlement and sales data; finally, it combines policy documents to interpret cross-border regulatory intentions and judge their impact on capital flows. The report also uses charts to show the historical trend of RMB exchange rate and net settlement ratio, enhancing visual support for conclusions.

Methodology notes

• Macroeconomic frameworkMoney-Credit Quadrant

  Judging monetary policy and balance of payments status by analyzing indicators such as foreign exchange reserves, exchange rates, and capital flows

  The report judges the direction of capital flows through changes in foreign exchange reserves and exchange rate trends, belonging to part of the Money-Credit Quadrant analysis, used to assess macroeconomic stability.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Explaining the reasons for changes in foreign exchange reserves from the perspective of import and export supply and demand

  The report attributes the growth in foreign exchange reserves to strong export performance (supply advantage) and import decline (weak demand), reflecting the application of the supply-demand framework in analyzing trade balance.

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Capturing policy signals through the difference between actual data and market expectations

  The unexpected growth in foreign exchange reserves reflects the market's underestimation of China's economic fundamentals, and the report uses this to correct judgments on future policy trends.

Key data

• May Foreign Exchange Reserves$344.22 BillionMonth-on-month increase of $31.7 billion, exceeding expectations
• CFETS Exchange Rate Index Increase+1.5%May RMB Nominal Effective Exchange Rate Rise
• REER Increase+1%Real Effective Exchange Rate Rebound to Beginning-of-Year Level
• Central Bank Gold Purchase Volume0.32 Million OuncesSignificantly Higher Than H2 2025 Average of 0.03 Million Ounces
• US Treasury Holdings Decrease-$41 BillionMarch China US Treasury Holdings Dropped to $652.3 Billion
• Expected Capital Outflow$20 BillionFlat Compared to Previous Month, Showing Stable Capital Flows

Impact & implications

Growth in foreign exchange reserves and RMB strengthening help boost market confidence in China's macroeconomy and ease depreciation expectations. Clarification of cross-border regulatory policies also helps stabilize foreign capital sentiment and promote the RMB internationalization process. However, if the RMB appreciates too quickly, it may trigger trade friction, and policies need to balance between stabilizing growth and preventing overheating.

Risks

• Rapid RMB appreciation may exacerbate trade friction
• Global economic uncertainty affects export prospects
• Cross-border regulatory enforcement intensity may trigger market volatility

What to watch

• May trade data released next week will provide more details
• Whether the central bank will continue to accelerate gold purchases to stabilize foreign exchange reserves
• Implementation status of cross-border regulatory details and their impact on market behavior