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China economy

China’s foreign exchange reserves climb for 10th straight month

Tougher controls and a strong yuan continue to curb capital outflows

PUBLISHED : Thursday, 07 December, 2017, 5:45pm
UPDATED : Thursday, 07 December, 2017, 5:45pm

China’s foreign exchange reserves rose for a 10th straight month in November, though slightly less than market expectations, as tight regulations and a strong yuan continued to discourage capital outflows.

Capital flight had been seen as a major risk for China at the start of the year, but a combination of tighter capital controls and a faltering dollar helped the yuan stage a strong turnaround, bolstering confidence in the economy.

Reserves rose US$10 billion in November to US$3.119 trillion, compared with an increase of US$700 million in October, central bank data showed on Thursday.

Economists polled by Reuters had expected reserves to rise by US$11 billion to US$3.120 trillion.

It was the first time that China’s reserves have climbed for 10 months in a row since June 2014, and brought its stockpile – the world’s largest – to the highest since October last year.

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The State Administration of Foreign Exchange said the appreciation of non-US dollar currencies and changes in asset prices were the main reasons behind the rise in forex reserves.

The yuan has gained about 5 per cent against the dollar this year, following a drop of 6.5 per cent in 2016, its biggest annual drop since 1994.

China’s foreign exchange reserves dropped by nearly US$1 trillion from a peak of US$3.99 trillion in June 2014 to US$2.998 trillion in January this year as it sought to shore up the yuan and reduce capital outflows. But reserves have since climbed by US$121 billion.

A Reuters poll found that long positions on the yuan held by investors in Asia by the end of November rose to the highest since September, as the dollar continues to falter in global markets.

Some analysts believe more stability in the yuan and less pressure on outflows could prompt authorities to lighten their hand on regulations.

“It therefore seems like an opportune time for [China’s central bank] to take further baby steps towards the long-held goal of exchange rate liberalisation, most likely starting with a widening of the renminbi trading band,” said Julian Evans-Pritchard, China economist at Capital Economics.

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The slide in the yuan and foreign exchange reserves last year prompted China to restrict capital outflows, including a clampdown on “irrational” outbound investments in property, hotels, entertainment, sports clubs and film industries.

On Monday, Chinese financial news outlet Yicai quoted Pan Gongsheng, head of the State Administration of Foreign Exchange, as saying that China had “basically exited” from curbs on firms’ irrational outbound investment deals.

Valuation effects due to the dollar’s drop against major currencies such as the euro and yen are also behind the rebound in China’s reserves.

The dollar tumbled 1.6 per cent against major trading currencies in November.

The yuan’s surge this year has helped increase foreign purchases of Chinese bonds and stocks but authorities might have got a bit queasy as Beijing has long stated that it seeks two-way fluctuation in the Chinese currency.

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Net foreign exchange buying by both China’s central bank and commercial banks rose to multi-year highs in October, marking a policy victory for the authorities after a long battle to stabilise the yuan, although analysts say capital flows are likely to remain volatile as the economy slows.

The value of gold reserves rose to US$75.833 billion at the end of November, from US$75.238 billion at the end of October, data on the PBOC website also showed.