China forex reserves surge

BEIJING: China’s foreign exchange reserves rose in May for a fourth consecutive month and by more than markets had expected, as stringent capital control measures and a weakening in the dollar helped staunch outflows.

Reserves rose US$24bil in May to a seven-month high of US$3.054 trillion, compared with an increase of US$21bil in April to US$3.030 trillion, central bank data showed yesterday.

It was the first time since June 2014 that reserves climbed for four months in a row, and the biggest gain since reserves moved back above the closely watched US$3 trillion level in February.

Economists polled by Reuters had expected reserves to rise US$10bil.

A weaker US dollar boosted the value of other currencies and non-dollar assets held by China in May, the State Administration of Foreign Exchange said in a statement explaining the rise.

Foreign exchange supply and demand was basically balanced in the month, it added.

In May, the dollar recorded its largest monthly percentage loss against a basket of major currencies since January.

Tighter restrictions on taking funds out of the country imposed in recent months continue to keep a lid on capital outflows, said Zhou Hao, a Singapore-based analyst at Commerzbank.

“From their perspective, they have done a very successful job.” Apart from valuation effects, Capital Economics’ Julian Evans-Pritchard said China’s central bank may also have been purchasing small quantities of foreign currencies again in May after having sold forex to shore up the sagging yuan for 18 straight months.

“This a major shift in policy that has been achieved thanks to an easing of capital outflows,” he said.

“Given our forecast for China’s May trade balance (due out on Thursday), today’s figures still point to capital outflows of around US$10bil last month. But this is down from US$30bil in April and US$65bil at the end of last year.”

In April, net foreign exchange sales by the People’s Bank of China (PBoC) fell to the lowest in nearly two years as capital outflows eased in the face of strict regulatory curbs and a pause in the dollar’s rally.

The forex regulator said last month that China’s current cross-border capital flows are stabilizing, but debt risks and signs of slowing economic growth have forced policymakers to keep a tight leash on outflows.

China burned through nearly US$320bil of reserves last year but the yuan still fell about 6.5% against the dollar, its biggest annual drop since 1994.

After steadying early this year, the yuan suddenly bolted to near seven-month highs in recent weeks after the central bank changed the way it calculates its official daily reference point to quash expectations of further depreciation and outflows as the US raises interest rates.

The uncharacteristically rapid appreciation engineered by Chinese authorities were also seen as a show of strength and a warning to speculators after the country’s credit rating was downgraded by Moody’s on May 24.

The moves have prompted some investment banks to scale back views of yuan weakness this year, with some now saying it could end 2017 relatively unchanged.

In further evidence that Beijing remains concerned about a resurgence of outflows, the foreign exchange regulator announced last Friday that Chinese banks would be required to report daily on bank card holders’ overseas transactions exceeding 1,000 yuan (US$147).

To be sure, veteran China watchers have cautioned that Chinese companies and individuals would find ways around the capital controls eventually.

Indeed, French investment bank Natixis said in a report that its capital flow tracker for China showed outflows for the second quarter will rise somewhat, reversing the trend in the first quarter.

But while moves to stabilise the yuan may have reassured China’s financial markets, they have come at a price. Persistent depreciation fears along with China’s tighter capital controls and currency interventions have dealt a setback to Beijing’s ambitions to make the yuan a global currency.

The yuan has slipped to the seventh-most actively traded currency for global trade finance, transaction service provider Swift said.

Some Western firms have also been concerned about their ability to remit profits and dividends from China.

The value of gold reserves fell to US$75.004bil at the end of May, from US$75.019bil at end-April, data published on the PBoC website also showed. – Reuters