China Reserves Post First Gain Since June Amid Capital Curbs

Updated on
  • Stockpile rose by $6.9 billion to $3.005 trillion last month
  • Global financial market uncertainties remain: SAFE statement

Why Money Keeps Flowing Out of China

China’s foreign-currency reserves unexpectedly halted a seven-month losing streak, rising in February amid tighter controls on capital outflows and a rally in the yuan.

The stockpile increased by $6.9 billion to $3.005 trillion last month, the People’s Bank of China said Tuesday. That exceeded the $2.969 trillion estimate in a Bloomberg survey of economists.

"Strict capital controls have taken effect, as it has reduced outflows and helped market sentiment on the yuan," said Zhao Yang, Hong Kong-based chief China economist at Nomura Holdings Inc., which Bloomberg ranks as the top forecaster for the stockpile. "Reserves still face pressures, as the nation won’t want to keep tight capital controls in place for the medium term as they create difficulties for firms and thus weigh on the economy."

Stronger economic growth, stricter capital controls and a stabilizing yuan are helping stem declines in the world’s largest foreign-currency hoard. The reserves -- still the world’s largest -- have shrunk from a peak of $4 trillion in 2014 as policy makers sold dollars to slow yuan depreciation.

The offshore yuan extended gains to rise as much as 0.17 percent after the data. The currency was little changed at 6.8994 per dollar as of 6:10 p.m. in Hong Kong.

‘Important Signal’

Authorities stepped up efforts to prevent outflows since late 2016, as the yuan headed for the biggest annual loss in more than two decades. Measures include ordering banks to stop processing cross-border yuan payments until they balance inflows and outflows. Residents face tougher reporting requirements when they want to convert yuan into foreign currency.

Read More: China Gets Stricter on Forex Transactions to Limit Outflows

"The fact that they showed the world that the reserves are stabilizing at a fairly high number is an important signal," said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. "The realization that the leadership wants us to have is that China is out of the woods, it’s not losing reserves, and we’re back to normal."

Outflow pressures are expected to ease and reserves may gradually stabilize, according to a statement from the State Administration of Foreign Exchange, which executes currency policy. Still, global financial market uncertainties remain, SAFE said.

With pressure on reserves easing in recent months, the onshore yuan has advanced 0.7 percent this year amid a decline in the Bloomberg Dollar Spot Index.

"The rebound is a surprise as there should have been a negative valuation effective given that the dollar gained in February,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The increase shows the PBOC probably hasn’t been doing much spot market intervention last month, given market sentiment was stable and onshore yuan trade volume has been lower than usual.”

— With assistance by Tian Chen, Emma Dai, and Xiaoqing Pi

(Updates to add capital controls in sixth paragraph.)
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