China's FX reserves just recorded a shock increase

Photo: iStock

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 $US6.92 billion to $US3.005 trillion during the month.

That came as a surprise to economists who were expecting a further decline of $US25 billion, and a reversal on the $US12.3 billion decrease reported in January.

Source: CBA

Over the course of 2016, China’s total FX reserves fell by $US320 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 totalled $US40 billion in February.

“According to our estimation, valuation effects, that is changes caused by exchange rate fluctuations and investment returns, resulted in a gain of $US45 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 $US7 billion in China’s FX reserves in February.

Source: CBA

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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