China forex reserves rebound above $3 tn in February

Capital controls appear to be working in China, where foreign currency reserves reversed course in February and moved higher by $6.9 billion.

Cross-border capital flows were relatively balanced in February, the State Administration of Foreign Exchange (SAFE) said in a statement after reserves data on the month was released. The reserves are down from a peak of $3.99 trillion in June 2014. Meanwhile, the greenback fell against other major currency rivals as investors booked profit from its recent bull run amid growing expectations of a Federal Reserve rate increase this month. The February rebound may ease such concerns, analysts said. That compared with a 1.3 percent firming in January.

Cross-border outflows will ease somewhat and China's foreign reserve levels will "gradually stabilise" in the future, the country's forex regulator said on Tuesday.

Stronger economic growth, stricter capital controls and a stabilizing yuan are helping stem declines in the world's largest foreign-currency hoard.

It burned through almost $320 billion of reserves past year but the yuan still fell 6.5 percent against the dollar, its biggest annual drop since 1994.

" ... February's data was not helped by the US dollar, which gained 0.3% against the SDR [the International Monetary Fund's roughly $285 billion special drawing right that supplements countries' official reserves] and therefore depressed the value of reserves held in other currencies".

However, expectations of US interest rate hikes beginning as early as next week have rekindled fears that the yuan could come under renewed pressure.

The rebound in reserves could ease fears in global markets that China will engineer another sharp one-off devaluation of the yuan, which would run the risk of inflaming trade tensions with the new US administration under President Donald Trump.

  • Zachary Reyes