China’s foreign exchange reserves rose for a 10th straight month in November, though slightly less than market expectations, as tight regulations and a strong yuan continued to discourage capital outflows.
Capital flight had been seen as a major risk for China at the start of the year, but a combination of tighter capital controls and a faltering dollar helped the yuan stage a strong turnaround, bolstering confidence in the economy.
Reserves rose $10bn in November to $3.119tn, compared with an increase of $700mn in October, central bank data showed yesterday.
Economists polled by Reuters had expected reserves to rise by $11bn to $3.120tn.
It was the first time that China’s reserves have climbed for 10 months in a row since June 2014, and brought its stockpile — the world’s largest — to the highest since October last year.
The State Administration of Foreign Exchange said the appreciation of non-US dollar currencies and changes in asset prices were the main reasons behind the rise in forex reserves.
Valuation effects due to the dollar’s drop against major currencies such as the euro and yen are also behind the rebound in China’s reserves.
The dollar tumbled 1.6% against major trading currencies in November.
The yuan has gained about 5% against the dollar this year, following a drop of 6.5% in 2016, its biggest annual drop since 1994.
China’s foreign exchange reserves dropped by nearly $1tn from a peak of $3.99tn in June 2014 to $2.998tn in January this year as it sought to shore up the yuan and reduce capital outflows. But reserves have since climbed by $121bn.
A Reuters poll found that long positions on the yuan held by investors in Asia by end-November rose to the highest since September, as the dollar continues to falter in global markets.
Some analysts believe more stability in the yuan and less pressure on outflows could prompt authorities to lighten their hand on the currency.
“It therefore seems like an opportune time for (China’s central bank) to take further baby steps toward the long-held goal of exchange rate liberalisation, most likely starting with a widening of the renminbi trading band,” said Julian Evans-Pritchard, China Economist at Capital Economics.
The slide in the yuan and foreign exchange reserves last year prompted China to restrict capital outflows, including a clampdown on “irrational” outbound investments in property, hotels, entertainment, sports clubs and film industries.
On Monday, Chinese financial news outlet Yicai quoted Pan Gongsheng, head of the State Administration of Foreign Exchange, as saying that China has “basically exited” from curbs on firms’ irrational outbound investment deals.
The yuan’s surge this year has helped increase foreign purchases of Chinese bonds and stocks but authorities might have got a bit queasy as Beijing has long stated that it seeks two-way fluctuation in the Chinese currency.
Net foreign exchange buying by both China’s central bank and commercial banks rose to multi-year highs in October, marking a policy victory for the authorities after a long battle to stabilise the yuan, although analysts say capital flows are likely to remain volatile as the economy slows.
Still, some economists believe it is premature for the Chinese authorities to loosen capital controls as money flight could pick up due to expected US rate rises and tax cuts.
“Looking ahead, I think capital controls are still necessary given the depreciation pressure on the yuan could be very big next year,” said Tang Jianwei, an economist at Bank of Communications in Shanghai.
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