China’s forex reserves extend run of rises in December as controls bite and yuan gains ground

Increase outstrips expectations and November figure to take total to US$3.14 trillion

PUBLISHED : Sunday, 07 January, 2018, 3:44pm
UPDATED : Sunday, 07 January, 2018, 11:08pm

China’s foreign exchange reserves grew faster than expected to hit their highest point in more than a year in December as tight regulations and a strong yuan continued to discourage capital outflows, according to official data released on Sunday.

Notching up an 11th straight month of gains, the reserves rose US$20.2 billion in December to US$3.14 trillion, the highest since September 2016 and the biggest monthly gain since July, central bank data showed.

That compares with an increase of US$10 billion in November.

Economists polled by Reuters had expected the reserves to rise by US$6 billion to US$3.125 trillion.

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For the full year, China’s forex reserves rose US$129.5 billion from US$3.011 trillion at the end of 2016. That is the first annual rise since 2014.

Analysts said the forex market was expected to remain stable this year but Chinese policymakers would be cautious in easing control of the capital account, given Beijing’s top priority is managing economic risks.

The yuan has risen for 11 months in a row, a sharp contrast to a year ago when it fell to nearly 7 to the US dollar, pushing the forex reserves below the psychologically important US$3 trillion mark as the central bank sought to defend the currency’s value.

But the yuan has since recovered, reaching 6.49 per US dollar on Friday.

“The yuan is without doubt the biggest surprise of last year,” Larry Hu, chief Greater China economist of Macquarie Securities, wrote in a research note.

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“The rise of the yuan is due to many factors, but the combination of capital controls and the US$1.5 trillion-plus goods trade surplus accumulated in 2015-2017 could have played the most important role.”

The value of the country’s gold reserves rose to US$76.47 billion at the end of December, up from US$75.83 billion a month earlier, according to the People’s Bank of China.

Hu said he expected the yuan-dollar exchange rate to stay between 6.4 and 6.9 this year, with more official changes in the wind.

“Policymakers are set to ease capital controls and relaunch the drive for financial transparency,” he said.

The weak greenback is also widely seen as a key contributor, with the US dollar index – a measure of the dollar’s value against a basket of currencies – hovering at 92, down from 102 a year earlier.

ING chief Greater China economist Iris Pang said it would be hard for the forex reserves to fall given the yuan’s appreciation. “It will be the same case this year,” she said.

Pang said the Chinese currency could rise 3 per cent against the US dollar in 2018 because of China’s solid economic performance and the continued weakness of the greenback.

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But there are no signs that Beijing has any immediate plans to remove the capital controls put in place a year ago to staunch massive capital outflows and its falling currency and reserves.

The National Development and Reform Commission, the country’s top economic planner, has stepped up the scrutiny of outbound deals by private firms, bringing their overseas subsidiaries under its oversight from March.

And last month, the forex regulator announced that individual Chinese would be limited to a maximum of 100,000 yuan (US$15,400) in overseas withdrawals a year.

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Pang said Beijing did not want to see a volatile forex market because risk prevention was one of the top priorities outlined at the central economic work conference last month.

“They might loosen some control measures in the second half of this year, but they will be very careful,” she said. “Stability in the forex market will help policymakers focus on dealing with domestic financial risks.”

China’s foreign exchange regulator said in a statement on its website on Sunday that it would keep the nation’s forex reserves and international balance of payments “balanced and stable” in 2018.

Additional reporting by Reuters