The rise reported by the central bank on Saturday follows five consecutive monthly declines. It indicates weakening investor expectations of a depreciating yuan and Beijing’s successes in stemming the outflow of illegal money transfers out of the country.
Still, as worries remain over slowing growth in the world’s second-largest economy, it is likely that China’s central bank will continue its monetary-easing policies to shore up growth. Last month, China lowered interest rates for the sixth time over the past year.
China’s reserve levels rose by $11.39 billion to $3.526 trillion in October from a month earlier, the People’s Bank of China said. This is only the third time China’s foreign-exchange reserves have risen in the last 15 months and the first since dipping sharply in August after China’s surprise move to devalue its currency.
Changes in China’s foreign-exchange reserves are a proxy for capital inflows and outflows, though money also moves past China’s borders in ways officials can’t track.
Outflows are a relatively new puzzle for Beijing. Its foreign-exchange reserves piled up for more than a decade as the central bank bought dollars flowing into its money supply from the country’s massive export volumes. As the world’s No. 2 economy slows, the direction of its capital movement has reversed.
Outflows reached a historic volume after China’s central bank devalued the yuan in mid-August, then was forced to step up its selling of dollar assets, particularly U.S. Treasurys, to counter a sharp selloff in its currency. The move led to China’s foreign-exchange reserves falling by a record monthly $93.9 billion in August, its steepest percentage drop since March 2012.
Those pressures have eased as interventions from the People’s Bank of China signal it is unlikely the central bank will tolerate further major movements in the currency, at least to the end of the year, analysts say. The summer’s slump in Chinese stock markets has also reversed, potentially giving investors more reason to keep their money inside the country.
“We think these outflows are now reversing because market expectations for significant renminbi depreciation have now eased after PBOC intervention helped stabilize the currency and expectations for U.S. rate hikes have been pushed back,” Capital Economics economist Julian Evans-Pritchard said, referring to the currency by its other name.
The U.S. Federal Reserve’s decision not to raise rates at its September meeting made capital less likely to flee China for the U.S. seeking higher returns. The Fed last week kept alive the possibility of a rate increase in December. Such a renewed likelihood could again amp up outflow pressures on China in coming weeks, though that is likely to be outweighed by expectations that the PBOC would continue to put a floor under yuan depreciation.
“We have long held the view that the capital outflows pressure is manageable,” said Larry Hu, China economist for Macquarie Securities.
Illegal foreign-exchange transfers out of the country were a factor in the decline, and reducing such flows are likely a factor in the reversal, analysts say. Foreign-exchange reserves are released back to the market when the central bank sells its dollar holdings—in a reversal of what it does with foreign-currency inflows during a boom—to support the yuan, but not all of it makes it out of the country via approved investments. Some end up spirited offshore in amounts beyond China’s legal limits in search of hard-currency assets. The central bank has said it is escalating a campaign to stem illicit outflows, which are often associated with money laundering.
The PBOC has estimated that outflows attributed to illegal underground banks amounted to about 800 billion yuan ($125 billion) from April to October this year.
The central bank continues to spend to prevent its currency from sharply falling further. The onshore yuan on Oct. 30 posted its biggest one-day gain since March 2014 after an apparent intervention by the central bank. Traders said authorities could be boosting the currency ahead of the International
Monetary Fund’s meeting later this month, when it will determine the composition of its elite basket of reserve currencies.
Source: Wall Street Journal by Chuin Wei Yap
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