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China economy

China’s foreign exchange reserves continue to rise in fresh boost for country’s economic prospects

Increase was smallest recorded this year, but analysts predict rosy outlook will allow central bank to ease capital controls

PUBLISHED : Tuesday, 07 November, 2017, 8:01pm
UPDATED : Tuesday, 07 November, 2017, 10:29pm

China’s foreign exchange reserves continued to pile up in October, rising for the ninth month in a row, although the increase of US$700 million recorded for the month was the smallest this year.

The People’s Bank of China (PBOC) said on Tuesday that its foreign exchange reserves reached US$3.11 trillion at the end of October, showing a picture of a balanced capital flow and offering fresh evidence of Beijing’s confidence in its economic prospects.

The central bank has “a stronger grip” on the yuan exchange rate now thanks to the adoption of a murky counter-cyclical factor in setting the daily price of the yuan, Larry Hu, the chief China economist for Macquarie Securities, wrote in a note.

“As capital outflows have disappeared from the headlines, we expect the PBOC to further ease capital controls,” he said.

The foreign exchange reserve data was released a day ahead of US President Donald Trump’s visit to China.

A stable reading for China’s foreign exchange stockpile could in theory offer Beijing a more comfortable position when talking with Washington as it is a sign of Chinese economic resilience and the government’s overseas spending power.

Meanwhile, the pressure on the yuan and China’s capital flow situation remained modest after Trump nominated Jerome Powell to succeed Janet Yellen at the Federal Reserve in February as he is widely expected to take a dovish policy stance.

Pan Gongsheng, the head of China’s State Administration of Foreign Exchange and a deputy central bank governor, said last month that China was seeing less need to support the yuan.

Chen Long, a Beijing-based researcher at Gavekal, wrote that the exchange rate of the yuan was no longer “misaligned” with the fundamentals and that the currency “would not be too vulnerable to another round of dollar strength”.

“With better fundamentals and a more credible currency policy, volatility in [the yuan’s exchange rate] will be less shocking to markets inside and outside China,” he wrote.

In a statement published on Monday, China’s foreign exchange regulator said the country had returned to a “twin surplus” in both its current account and capital account in the first three quarters of this year.

China’s current account surplus was US$106.3 billion in the first nine months of this year, or about 1.2 per cent of its gross domestic product.

Meanwhile, it reported a US$60.8 billion surplus in its financial account for the first nine months, a big turnaround from a deficit of US$389 billion in the same period last year.