The decline in China’s foreign exchange reserves slowed last month, the central bank said yesterday, an unexpected spot of good news for policymakers in Beijing facing a flood of cash leaving the country.
China’s foreign-exchange reserves dropped to $3.20tn at the end of February, the People’s Bank of China (PBoC) said on its website, beating economists’ median prediction of $3.19tn in a Bloomberg News survey.
The figure represented a drop of $28.6bn from the month before – far smaller than the $99.5bn decline in January or December’s record monthly drop of $108bn as the central bank sold dollars to prop up the yuan.
Chinese economic authorities have embarked on a charm offensive in recent weeks, seeking to reassure global markets over the health of the world’s second-largest economy and its currency.
A rocky start to the year has seen the yuan’s central rate against the dollar surprisingly lowered by authorities, a surge in capital flight, and ratings agency Moody’s cutting its outlook on Chinese sovereign bonds.
At a G20 finance ministers meeting in Shanghai 10 days ago China’s central bank governor said that “there is no basis for persistent renminbi depreciation from the perspective of fundamentals”.
Julian Evans-Pritchard, China economist for Capital Economics, said in a note: “The upshot is that the combination of tighter capital controls along with efforts by the PBoC to better communicate its intention not to devalue the renminbi seems to be bearing some fruit.” He added that expectations of further depreciation of the yuan have eased and investors are “gradually coming around to our view that the PBoC still has plenty of firepower to defend the currency”.
Meanwhile, Finance Minister Lou Jiwei said in Beijing yesterday that growth in China’s fiscal income will slow in future, but the country still has room to increase government debt.
China could moderately increase its fiscal deficit ratio to gross domestic product (GDP), although not by too much, Lou Jiwei said at a news conference during the annual session of parliament. “Our fiscal income is in a severe situation. We need to expand the fiscal deficit, but it is hard to say how much room is appropriate,” Lou said.
“We have some room, but cannot increase too much,” added, noting that China’s fiscal income accounts for around 30% of GDP, “which is relatively low compared with other countries and far lower than that in developed countries.”
China has budgeted a 2016 deficit of 3% of gross domestic product, the finance ministry said on Saturday, compared with an actual fiscal deficit ratio of 2.4% in 2015.
Some analysts say that target is too conservative to actually stabilise sliding economic growth, while others warn of the impact it could have on the government’s balance sheet.
“This points to a further increase in leverage in the economy which risks raising contingent liabilities for the government,” said Marie Diron, a senior vice president at Moody’s in emailed comments on the new deficit target. Moody’s downgraded its outlook on Chinese government debt to “negative” from “stable” on Wednesday, citing uncertainty over authorities’ capacity to implement economic reforms, rising government debt and falling reserves.
HSBC estimates central and local government budgeted bond issuance together will increase by nearly 35% this year to 2.18tn yuan ($334.76bn).
The 3% deficit target disappointed some analysts, who had hoped for more aggressive measures to prop up growth in the world’s second-largest economy.
However, Chinese regulators have also said they will increase the efficiency of government investment, which would theoretically produce better economic gains without aggravating China’s already massive stockpile of underperforming loans.
However, whether central government has gotten better at precisely targeting lending, as opposed to spurring overinvestment in industries seen as favoured by Beijing that results in asset bubbles, is a major question.
Lou said that if state-owned banks see profitability fall thanks to increased levels of non-performing loans, the finance ministry would give them “appropriate help”. But he denied this support would constitute special treatment for banks in which the government is a major shareholder.
Chinese officials are still incentivised to drive economic growth, and quick investment projects in infrastructure, airports or commercial real estate is generally the easiest way to do so, regardless of whether the project actually meet a market need or not.
“The longer the Chinese economy continues to add debt, the more risky we will perceive the situation to be,” said Andrew Colquhoun, head of Asia-Pacific sovereign rating at Fitch.
Central bank vice governor Yi Gang said in a separate conference that he is confident that China has adequate foreign exchange reserves, pointing out they are the largest in the world.
China’s sharp drawdown of reserves in recent months to alleviate downward pressure on its yuan currency have unnerved global financial markets, though it continues to have the most reserves in the world.