China’s foreign exchange reserves dipped below $3tn in January for the first time in five years but the decline was the lowest in seven months as tighter capital controls and a stronger renminbi discouraged outflows.
Official reserves fell by $12.3bn to just under $3tn, well below the average $52bn monthly drop in the third quarter of last year.
China’s reserves peaked at $3.99tn in June 2014 but since then the central bank has sold dollars aggressively to curb renminbi depreciation.
But a stronger renminbi in January weakened investor impetus to buy foreign currency, reducing the need for intervention. The renminbi recovered by 1 per cent in January, in line with a broader downward correction in the dollar following the US currency’s surge after Donald Trump’s election as president and the Federal Reserve’s interest rate rise in December. The renminbi weakened by 6.5 per cent versus the dollar in 2016, its biggest annual decline on record.
Zhang Yu, head of international research at Minsheng Securities in Beijing, warned that the currency’s January gains may be shortlived.
“The renminbi was on an appreciation path in January, which was supportive for capital inflows,” she said. “But it’s premature to look at these numbers and conclude that overall expectations about renminbi depreciation have turned.”
Analysts expect the renminbi to hit 7.18 per dollar in a year from its current level of 6.87, according to a Reuters poll of 50 analysts released on Tuesday. Chinese households expect the rate to hit 7.35, according to a survey by FT Confidential. Both would be a 10-year low.
Rising Chinese interest rates have also increased the appeal of keeping money in the country. The People’s Bank of China has guided money-market rates higher in recent weeks by raising rates on loans to commercial banks through market operations and other monetary policy tools.
PBoC tightening helped blunt the impact of expectations for further Fed rate rises, which had created substantial outflow pressure over the past two years — a period when Chinese rates were falling. Withdrawal of cross-border bank loans and deposits from China have been a larger contributor to overall capital outflows since 2015 than the much-publicised outbound acquisition spree.
China’s central bank and foreign exchange regulator have imposed new restrictions in recent months as they seek to staunch the flow of cash moving offshore. The measures include tighter approvals for foreign acquisitions, stricter rules on forex purchases by individuals and limits on cross-border renminbi remittance, which enables investors to buy foreign currency in the unregulated offshore market.
The State Administration of Foreign Exchange said late last month that it would strengthen monitoring of cross-border fund flows and ensure compliance with existing rules. “Real and legitimate cross-border payments and remittances will not be affected,” it added.
The Financial Times reported last month that tighter forex controls had also begun to affect trade flows by restricting certain forms of import financing. The following day, Safe issued a statement denying unspecified media reports that it was cracking down on import financing.
Analysts mostly played down the importance of China’s reserves breaching the $3tn barrier, which media had speculated was a key threshold for the PBoC.
“We don’t think $3tn is some sort of bottom line for China’s forex reserves,” said Yan Ling, economist at China Merchants Securities. “People shouldn’t worry too much about it.”
Additional reporting by Ma Nan
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