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Foreign Exchange Reserves In China Continue To Grow

China's foreign exchange reserves continued to strengthen with June being the fifth consecutive month of growth recorded this year, even though the growth rate was lesser than what market analysts had expected.

Reserves were up by $3.2 billion in June reaching $3.057 trillion, the highest level in eight months. Analysts have attributed it to the success of tighter regulations on capital outflows and slowing of the dollar’s rally. Julian Evans-Pritchard, China economist at Capital Economics has estimated that capital outflows in June was $10 billion as opposed to $29 billion in May.

The country's foreign exchange regulator has confirmed that the cross-border capital flows were becoming more balanced resulting in stable reserves. The State Administration of Foreign Exchange (SAFE) said in a statement that the reserves were up due to non-dollar currencies appreciating against the dollar in the past month.

Evans-Pritchard has also noted that June could become the first month after October 2015 in terms of the People’s Bank of China (PBoC) being a net buyer of foreign currency. China went through almost $320 billion of its reserves last year in a bid to boost the yuan which nonetheless fell by nearly 6.5 percent against the dollar. In parallel, it unveiled an array of measures to control capital outflows which seem to have had the desired effect. The yuan has risen by close to 2 percent in recent months.

In the past few months, China has been re-accumulating foreign currency, eliminating worries of its diminishing reserves. According to data released by SAFE, China has also recorded a surplus in the first quarter with respect to capital and financial accounts, which indicate that there has been a net inflow of capital. Analysts have however hinted that the trend might not sustain.

French investment bank Natixis has predicted that the capital flows for China in the second quarter of the year will reach $144.1 billion. Further, some state owned financial institutions have been found to be selling dollars recently, hinting that there was still pressure being placed on the yuan.

There have been concerns expressed that the regulations surrounding capital outflows has impacted cross-country transactions of foreign firms. China's premier Li Keqiang clarified at the World Economic Forum last month that the country would not control cross-border movements of earnings of such firms. According to forecasts by market analysts, the yuan is expected to slide to 7.05 vs. the dollar in the next 12 months.

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