China reserves posts gain amid capital curbs

Beijing - China’s foreign-currency reserves unexpectedly halted a seven-month losing streak, rising in February amid tighter controls on capital outflows and a rally in the yuan.

The stockpile increased by $6.9bn to $3.005trn last month, the People’s Bank of China said on Tuesday. That exceeded the $2.969trn estimate in a Bloomberg survey of economists.

"Strict capital controls have taken effect, as it has reduced outflows and helped market sentiment on the yuan," said Zhao Yang, Hong Kong-based chief China economist at Nomura, which Bloomberg ranks as the top forecaster for the stockpile.

"Reserves still face pressures, as the nation won’t want to keep tight capital controls in place for the medium term as they create difficulties for firms and thus weigh on the economy."

Stronger economic growth, stricter capital controls and a stabilising yuan are helping stem declines in the world’s largest foreign-currency hoard. The reserves - still the world’s largest - have shrunk from a peak of $4trn in 2014 as policy makers sold dollars to slow yuan depreciation.

The offshore yuan extended gains to rise as much as 0.17% after the data. The currency pared some gains to trade 0.1% higher at 6.8942 per dollar as of 10:48

'Important signal’

"The fact that they showed the world that the reserves are stabilizing at a fairly high number is an important signal," said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis in Hong Kong. "The realisation that the leadership wants us to have is that China is out of the woods, it’s not losing reserves, and we’re back to normal."

Outflow pressures are expected to ease and reserves may gradually stabilise, according to a statement from the State Administration of Foreign Exchange, which executes currency policy. Still, global financial market uncertainties remain, SAFE said.

With pressure on reserves easing in recent months, the onshore yuan has advanced 0.7% this year amid a decline in the Bloomberg Dollar Spot Index.

"The rebound is a surprise as there should have been a negative valuation effective given that the dollar gained in February,” said  Zhou Hao, an economist at Commerzbank in Singapore.

“The increase shows the PBOC probably hasn’t been doing much spot market intervention last month, given market sentiment was stable and onshore yuan trade volume has been lower than usual.”

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