China’s FX Reserves Show Surprise Increase To Cross $3 Trillion

The offshore Chinese yuan weakened against the dollar dropping by 0.04 percent to 6.8997 earlier this week, the lowest in two months even as the country’s foreign reserves climbed back over the psychological barrier of $3 trillion.

According to latest data from Chinese authorities, the foreign exchange reserves went up by $6.9 billion reaching $3.005 trillion, beating analysts’ expectations of a decline by $25 billion.

Reserves had fallen below the $3 trillion mark in January with a $38.8 billion drop, a first in five years.

The surprise increase in foreign exchange reserves broke the eight-month trend of declines that had worried analysts. The encouraging signs hint that the tighter capital controls has helped halt the outflows.

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In a statement, analysts from JP Morgan said

The February FX reserve data suggests that the policy efforts to contain capital outflows may have started to show some impact. Stricter capital outflow measures imposed on individuals and corporates may have in the near term managed to slow private sector capital outflows.

China’s currency had declined by a record 6.5 percent against the dollar in 2016 as a result of large capital outflows amidst slowing growth. The country’s central bank, the People’s Bank of China (PBOC) has been running through the reserves in the past few months in a bid to stem the weakness. In parallel, a range of capital control policies such as tighter approval norms, increased disclosure requirements for foreign exchange purchases and limits on cross-border remittances were implemented to control the capital flight.

If currency valuation impact is removed, China’s foreign exchange reserves may have gone up by as much as $23 billion in February according to analysts. Some analysts however believe that the Chinese New Year, which fell on January 28 could have influenced the capital flows as banks were closed. Mark Williams and Julian Evans-Pritchard, economists at Capital Economics said that a clear picture would be available when PBOC’s balance sheet is published.

Zhang Yu, head of international research at Minsheng Securities in Beijing also said February’s increases shouldn’t be seen as a turning point. He warned that there might be significant pressure on capital flows in coming months. A few analysts are expecting the Chinese administration to be more relaxed towards fluctuations in the yuan based on indications from a recent government report.

Wei Yao, an economist with Societe Generale pointed out that this year’s government work report had omitted an oft-repeated phrase that mentioned the aim of keeping the renminbi stable.

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