China's foreign reserves rise following capital controls

AP News
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Posted: Mar 07, 2017 5:44 AM

BEIJING (AP) — China's foreign exchange reserves rebounded unexpectedly from a six-year low in February after Beijing imposed controls to stop a flood of capital leaving the world's second-largest economy.

The reserves rose by a relatively modest $6.9 billion to just over $3 trillion, according to official data Tuesday, while private sector analysts had expected them to shrink.

The central bank has been spending the reserves them to keep the currency in line with the dollar after expectations it would decline led companies and small investors to move money out of the country. The reserves are down from a peak of $3.99 trillion in June 2014.

Beijing responded by tightening controls last year by stepping up scrutiny of proposed foreign investments and banning some activities by individual investors. Authorities announced Feb. 26 that police had broken up more than 380 underground banks last year that smuggled billions of dollars out of the country.

"China's capital controls may have started to slow capital outflow significantly," said Citigroup economists Li-Gang Liu and Xiaowen Jin in a report.

The data also suggest the People's Bank of China reversed course and bought foreign currency instead of yuan, according to analysts. That could lend ammunition to accusations by U.S. President Donald Trump that Beijing suppresses the yuan's exchange rate to give its exporters an unfair price advantage.

"It is certainly a striking shift and one that, potentially, could create tensions with the Trump administration," said Julian Evans-Pritchard and Mark Williams of Capital Economics in a report. "For February at least, the charge that China has been intervening to weaken its currency, may be justified."

The State Administration of Foreign Exchange attributed the rise to a change in the prices of assets in which it stores its reserves. But Liu and Jin said their calculations showed such changes should have caused the reserves to decline, suggesting other action also was involved.

The yuan could face further downward pressure if the U.S. Federal Reserve goes ahead with a widely anticipated interest rate hike. That would increase the return on U.S. bonds and other financial assets, drawing more money out of China.

Trump promised during his campaign to label Beijing a currency manipulator, a status that opens the way to possible trade penalties. Economists say that while that might have been true during the previous decade, market forces over the past two years have pushed the yuan lower and it would fall further if Beijing weren't intervening to prop it up.

The U.S. Treasury's next report on whether trading partners manipulate their currencies is due out in April.

The People's Bank bases the yuan's state-set exchange rate on a basket of currencies that is believed to be dominated by the dollar. That required Beijing to intervene to keep the yuan in line with the dollar as the greenback rose over the past two years.

Analysts estimated capital outflows in January at $45 billion, down from December's $61 billion.

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State Administration of Foreign Exchange (in Chinese): www.safe.gov.cn