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March 8, 2019

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Amid market optimism, China’s forex reserves hit 6-month peak

China’s foreign exchange reserves in February rose to their highest in six months as growing optimism over US-China trade talks buoyed the yuan currency, easing worries about capital outflows from the slowing economy.

While China’s economy continues to cool, analysts believe the risk of strong capital outflows has greatly diminished as the yuan regained its footing and foreign investors piled back into the country’s battered stock markets.

Chinese foreign exchange reserves, the world’s largest, rose by US$2.26 billion in February to US$3.09 trillion, central bank data showed yesterday, marking the highest level since August 2018.

Economists polled by Reuters had expected reserves to fall US$920 million to US$3.087 trillion.

The yuan gained 0.09 percent against dollar in February, and is up more than 2 percent so far this year. The dollar index against other major currencies rose 0.6 percent in February.

Financial markets’ bearish outlook on the yuan has seen a remarkable reversal in the last few months due to a host of factors: growing optimism for a US-China trade agreement, a soft US dollar and a sharp rise in foreign investors’ inflows into Chinese stocks and bonds.

A Reuters poll on Wednesday showed the yuan is expected to trade around current levels of 6.70 to the dollar in a year’s time, in sharp contrast to January when most analysts forecast it would drop through the 7-mark to decade lows.

A source briefed on the trade negotiations said on Sunday that the world’s largest economies appear close to an agreement that would roll back US tariffs on Chinese goods.

China’s state planner pledged on Tuesday to increase the flexibility of the yuan’s exchange rate, setting off speculation that a tweak to official wording could mean changes to its tightly managed currency regime.

China’s economic growth cooled to 6.6 percent in 2018, the slowest pace in 28 years. So far, tighter Chinese capital controls have discouraged heavy outflows like those seen in the last downturn in 2015, but the yuan still fell 5.3 percent versus the dollar last year.

Though not a major factor, increasing inflows of foreign capital have helped offset some of the pressure this year.

Net flows into the Shanghai and Shenzhen stock markets via the Stock Connect scheme as of end February topped 120 billion yuan (US$17.9 billion), nearly four times that in the first two months of 2018. Overseas investors are also showing a strong, sustained appetite for Chinese government bonds as the country’s debt is added into main global benchmarks this year.

Analysts are closely watching both trade talks and Chinese economic data for clues on where the yuan goes next.


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