China FX reserves increase

Chinese FX reserves did something that hasn’t been seen in eight months in February.

They increased.

According to the People’s Bank of China (PBoC), reserves lifted by $6.92 billion to $3.005 trillion during the month.

That came as a surprise to economists who were expecting a further decline of $25 billion, and a reversal on the $12.3 billion decrease reported in January.

China FXBusiness Insider Australia

Over the course of 2016, China’s total FX reserves fell by $320 billion, the largest annual drop since 1994.

That was partially driven by a rampant US dollar which gained 6.5% against the Chinese yuan, leading to a sharp increase in capital outflows as investors looked to protect against further yuan weakness.

Despite the recent reversal, Wei Li, China and Asia economist at the Commonwealth Bank, said that outflows likely totaled $40 billion in February.

China FXBusiness Insider Australia

“According to our estimation, valuation effects, that is changes caused by exchange rate fluctuations and investment returns, resulted in a gain of $45 billion in China’s FX reserves in February,” says Li.

“On the other hand, the PBoC is expected to have sold $US38 billion in the FX market to prop up the CNY… leading to a net increase of $7 billion in China’s FX reserves in February.

Li says that outflows have slowed in recent months, helped in part by a 0.8% increase in the yuan against the US dollar this year, tighter capital account controls introduced by China’s State Administration of Foreign Exchange (SAFE) and an improvement in the broader Chinese economy.

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