China's foreign reserves extend gains amid capital curbs

Beijing -  China’s foreign-exchange reserves posted an 11th straight monthly increase, capping a year of recovery amid tighter capital controls, a stronger yuan and resilient economic growth.

The reserves climbed $20.7bn to $3.14 trillion in December, according to a People’s Bank of China statement on Sunday, compared with a $3.13 trillion median estimate in a Bloomberg survey. That brought the full-year increase to $129bn.

The world’s largest foreign currency stockpile has been steadily rebounding since January, when it fell below $3 trillion for the first time in almost six years after the central bank propped up the yuan. The currency has come roaring back with authorities keeping a tight grip on money flowing out of the country and full-year economic growth set to pick up.

“The effective implementation of capital controls, most clearly shown in the crackdown on the activities of the corporate raiders, has greatly reduced the volume of external flows,” Michael Shaoul, chief executive officer of Marketfield Asset Management LLC in New York, wrote in a recent note.

China’s currency regulator, the State Administration of Foreign Exchange, cited gains in the value of non-dollar currencies for last month’s increase and said the nation’s economic performance had contributed to stable cross-border capital flows for the year. Looking ahead, SAFE predicted that the reserves, and the balance of payments, would be “stable.”

Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong, said he didn’t expect December’s pace of increase to be sustained because a rapid accumulation of reserves could escalate trade frictions - or even trigger a trade war. If the dollar keeps weakening, China’s central bank will probably relax some of its capital controls, he said.

Still, the prospect of higher US interest rates and the reset of a $50 000 cap on how much foreign currency Chinese individuals can convert each year have the potential to bolster capital outflows from China.

The yuan strengthened 6.8% against the greenback last year. The US currency weakened 8.5% versus leading peers, according to the Bloomberg Dollar Spot Index.

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