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October 10, 2017

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Forex reserves gain modestly for 8th month

CHINA’S foreign exchange reserves rose modestly in September for an eighth straight month, and by slightly more than markets had expected, as tighter regulations and a stronger yuan continued to discourage capital outflows.

A dramatic slowdown in capital flight — which had been seen as one of the biggest risks to China — has helped boost confidence in the world’s second-largest economy.

Forex reserves rose US$17 billion in September to US$3.109 trillion, compared with an increase of US$10.5 billion in August, central bank data showed yesterday.

Economists polled by Reuters had expected reserves to rise by US$8 billion.

It was the first time that China’s reserves have climbed for eight months in a row since June 2014, and brought its stockpile — the world’s largest — to the highest since October last year.

The consistent rise has led some analysts to believe the People’s Bank of China may have become a net buyer of foreign exchange for the first time in nearly two years.

“But we believe any such purchases reflect a desire to create uncertainty over the short-run trajectory of the currency rather than resisting medium-term appreciation,” Julian Evans-Pritchard, China Economist at Capital Economics, wrote in a note.

China has tightened rules on moving capital outside the country since late last year.

Beijing burned through nearly US$320 billion of reserves last year and the yuan still fell about 6.5 percent against the surging dollar, its biggest annual drop since 1994.

However, the yuan has seen a sharp rebound so far this year, thanks to a reversal in the dollar and a further widening of Beijing’s forex controls, including a clampdown on some overseas acquisitions by Chinese firms which some suspected were really being used to channel money offshore.

The yuan had gained 7.5 percent against the dollar through early September, but authorities have allowed it to backtrack a bit in recent weeks, possibly due to concerns that its rapid run-up would start to hurt China’s exports.

The dollar’s recent resurgence has also pressured the yuan of late, though few China watchers believe Beijing will allow it to retreat much further and risk rekindling outflows.

Taken together, the regulatory measures, exchange rate forces and a stronger trade surplus may have brought China’s capital flows roughly into balance for the first time in years.

“We believe that Chinese officials view the outflows as a critical threat, as they deplete China’s FX reserves and invoke unpleasant memories of the Asian financial crisis,” economists at ANZ said in a recent note.

“Therefore, we think the authorities will prefer stability more than anything else in the near term.”

The country’s outbound non-financial investment slumped 41.8 percent in January-August from a year earlier, as authorities kept a tight grip on outflows for what they call “irrational” overseas projects.

The State Council, or Cabinet, said in August China will cap overseas investment in property, hotels, entertainment, sports clubs and film industry.


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