China’s FX reserves drop for first time in 13 months

China’s foreign exchange reserves recorded a decline of $27 billion after 12 successive months of growth, driven by currency fluctuation and asset price corrections.

Figures published on March 7 by the People’s Bank of China show FX reserves decreased by $27 billion to $3.1345 trillion at the end of February – lower than the market expectation of $3.16 trillion.

China’s FX reserves stockpile had picked up steadily since February 2017, after dipping to $2.998 trillion in January. By reaching $3.1615 trillion at the end of January, the country’s FX reserves hit their highest level for more than a year. Overall, the PBoC accumulated more than $130 billion in FX reserves over the past 12 months.

The State Administration of Foreign Exchange – the body in charge of executing currency policy, set up by the PBoC – said in a statement that the decrease in China’s FX reserves in February was primarily driven by the depreciation of non-US currencies and changes in asset processes.

“Looking ahead, China’s economy has the conditions to continue the stable and favourable development. Driven by the fundamentals, the two-way fluctuation of the RMB exchange rate will become the norm, creating favourable conditions for the two-way capital flow and overall stability in the medium and long term,” Safe says.

“On the other hand, the global economy is expected to continue recovering. Major central banks tighten monetary policy gradually, triggering growing uncertainty in the financial market. Due to the combined effect of domestic and foreign factors, the scale of China’s foreign exchange reserves is expected to remain basically stable,” it adds.

Driven by the fundamentals, the two-way fluctuation of the RMB exchange rate will become the norm, creating favourable conditions

State Administration of Foreign Exchange

Last month’s limited intervention by the PBoC continues to be due to the rigorous capital controls it imposed more than a year ago. A set of measures limiting the amount of FX purchases by individuals and placing restrictions on foreign acquisitions has also helped to stabilise capital outflows.

In January, the PBoC decided to change the way it calculates the renminbi’s daily fix by suspending the countercyclical factor it introduced in May 2017, when the currency was under strong depreciation pressure.

The move suggests the PBoC is now more confident that the renminbi is less likely to fall victim to bouts of high volatility, caused by speculative flows, as often happened in the early part of 2017. Still, concerns remain over the pace of China’s adoption of a more flexible exchange rate policy.

FX reserves stockpile

Additionally, a stronger yuan across the board has helped the PBoC to reinvigorate its FX reserves stockpile. Last year, it appreciated by 6.8% against the greenback, reversing the trend witnessed in 2016, when the redback fell by 6.6% against the dollar in its biggest one-year loss since 1994, forcing the PBoC to deploy reserves of more than $300 billion to defend the currency from speculation.

After recording a 6.8% rise against the greenback in 2017, the renminbi further appreciated by 3.04% year-to-day. Yet, it fell 0.6% against the dollar in February – the first monthly fall since September 2017.

The consensus among forecasters contributing to FX Week is for USD/CNY to trade at 6.39 in 12 months’ time, up from the pair’s level of 6.32 at pixel time.