China August forex reserves, up for 7th straight month, reach US$3.092 trillion

August was the best month since 1994 for the yuan, which has gained more than 6.5 per cent against the dollar this year, erasing all of its 2016 losses.
August was the best month since 1994 for the yuan, which has gained more than 6.5 per cent against the dollar this year, erasing all of its 2016 losses.PHOTO: REUTERS

BEIJING (REUTERS) - China's foreign exchange reserves edged up for a seventh straight month in August as a surging yuan and tighter regulations signal the tide may be turning in China's battle against outflows.

August was the best month since 1994 for the yuan, which has gained more than 6.5 per cent against the dollar this year, erasing all of its 2016 losses.

In August, FX reserves rose nearly US$11 billion (S$14.8 billion) to US$3.092 trillion, the highest level since October last year. July's increase was US$24 billion.

August marks the first time that China's reserves have climbed seven months in a row since June 2014. A dramatic slowdown in capital outflows - which are seen as one of China's biggest risks - has helped boost confidence in its economy this year ahead of a key political leadership reshuffle next month.

A slowdown in outflows and market-driven gains for the yuan mean the People's Bank of China may have been a net purchaser of foreign exchange in August for the first time since October 2015, Julian Evans-Pritchard at Capital Economics wrote in a note.

"The big picture will still be that capital outflows have eased markedly since the start of the year," Evans-Pritchard said after the August data was released on Thursday. "This is partly the result of tighter restrictions on outbound direct investment but it also reflects a shift in sentiment," he said.

Capital Economics estimates outflows were about US$10 billion in August.

Last year, China burned through nearly US$320 billion of reserves but the yuan still fell about 6.5 per cent against the then-surging dollar, its biggest annual drop since 1994.

China's forex pile, the world's largest, fell below the closely watched US$3 trillion level in January for the first time in nearly six years, raising market fears that Beijing may devalue its currency to relieve the pressure.

But the Chinese currency this year has erased its 2016 losses, thanks largely to the US currency's sharp reversal and Beijing's steady tightening of forex controls.

The yuan has also been boosted by fresh steps by the central bank to flush out speculators who were betting the currency would continue to fall.

In August alone, the yuan rose 2.1 per cent against the USdollar, and on Thursday it broke through 6.5 yuan per dollar for the first time since May 2016.

Since late last year, Chinese authorities have steadily clamped down on outflows and have widened their net in search of other ways capital may be leaving the country.

In recent months, regulators have turned their attention to"irrational" overseas investment on high-profile acquisitions such as hotels and football teams around the world.

The state's cabinet issued rules on acquisitions abroad for the first time in August, signalling a further slowing of the flood of money that has flowed overseas in recent years.

China's non-financial outbound direct investment plummeted 44.3 per cent in January-July from a year earlier.

But Chinese acquisitions in countries officially linked to the Belt and Road initiative, a signature foreign policy of President Xi Jinping, totalled US$33 billion, surpassing the US$31 billion tally for all of 2016, Thomson Reuters data showed.

China's foreign exchange regulator, in a statement on its website Thursday, said cross-border capital flows and FX supply and demand continued to be balanced in August.

The State Administration of Foreign Exchange (SAFE) said a rise in international asset prices boosted China's foreign exchange reserves in August and added that reserves will remain at "reasonably appropriate" levels in the future.

Despite the yuan's newfound strength, most analysts believe that tougher forex controls will largely remain in place for some time after the Communist Party Congress in mid-October, even if that complicates Beijing's goal of attracting more foreign investors into mainland stocks and bonds.

Foreign exchange analysts polled by Reuters expect the high-flying yuan to give back much of its gains over the next year, if the dollar gets a lift from any further US interest rate hikes.

The yuan is forecast to weaken to 6.90 per US dollar in a year, according to the poll, from about 6.5 now.

Chinese authorities may also start to fret that the rapid pace of yuan gains could blunt export competitiveness.

The value of gold reserves rose to US$77.702 billion at the end of August, from US$75.084 billion at end-July, data published on the People's Bank of China website also showed.