China Economy

China’s foreign exchange reserves rise for second month in row

Recent recovery may have helped ease pressure on capital flight, with forex pool increasing by US$3.96b in March

PUBLISHED : Friday, 07 April, 2017, 4:27pm
UPDATED : Friday, 07 April, 2017, 11:04pm

China’s foreign exchange reserves rose for the second straight month in March, the first two-month rise since last April, offering signs of relief amid concerns about capital flight from the country.

Data released by the People’s Bank of China on Friday showed foreign exchange reserves rose by US$3.96 billion in March to US$3.0091 trillion, after rising US$6.9 billion in February.

In the first quarter, reserves fell by US$1.4 billion compared with the end of last year, a modest change.

The stabilisation comes after the government stepped up controls over outbound payments and investments to stem the flow of cash overseas.

China’s forex reserves drop below US$3 trillion for first time in six years

China’s recent economic recovery may have also have helped ease pressure on cash flowing abroad after the yuan fell against the US dollar.

China’s foreign exchange reserves, the largest in the world, are often seen as a barometer of capital flows and even investor confidence in the Chinese economy and the yuan. The reserves depleted quickly in late 2015 and early 2016 when concerns grew about China economic slowdown and financial stability. They shrank from a peak of nearly US$4 trillion in June 2014 to below US$3 trillion early this year, in tandem with a steady depreciation of the yuan against the dollar.

It seems the worst is now over for China’s capital flight and the yuan as the country’s economic growth stabilises. The yuan exchange rate has been hovering in a narrow range of around 6.9 against the dollar in the past months.

Claire Huang, China economist at Societe Generale, said Beijing’s control of outflow has “proved to be effective”.

At the same time, the US dollar’s weakness in March may have helped the valuation of China’s foreign exchange reserves, Huang said.

China’s central bank measures the reserves in both the US dollar and the Special Drawing Rights, the accounting unit of the International Monetary Fund. If measured by SDR, China’s reserves fell slightly in March.

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Standard Chartered economists led by Ding Shuang wrote in a note that China was unlikely to lose much reserves in 2017 and the size was expected to stay above US$2.9 trillion. In short, China’s foreign exchange reserves will shrink by only U$100 billion this year.

China central bank Governor Zhou Xiaochuan indicated last month that a massive pile-up of foreign exchange was not a sound policy and a decline in reserves was normal.

“The central bank’s campaign in defending the yuan exchange rate by selling US dollars may have ended,” Deng Hai­qing, an analyst at JZ Securities, wrote in a research note. “The pressure on the yuan to depreciate has probably fizzled away.”

Some investment banks have revised up forecasts of the yuan’s value for 2017.

Liu Ligang, chief China economist at Citi, believes the yuan may trade at about 7.08 to the dollar by the end of this year.

A stable yuan was part of Beijing’s overall “steady boat” economic policy ahead of the 19th Communist Party congress this year, and recent weakness of the dollar “has made such a policy more attainable”, Liu wrote in a research note.