China FX reserves inch up as US dollar slides

PBC may be happy if stronger yuan can defuse US tensions

China’s foreign exchange reserves rose slightly in March as broad US dollar weakness continued and escalating trade tensions between the world’s two largest economies strengthened expectations for the Chinese currency.

Reserves rose $9 billion in March to $3.143 trillion, compared with a drop of $27 billion in February, data from the People’s Bank of China (PBC), the central bank, showed on Sunday. Economists polled by Reuters had expected reserves to increase by around $6 billion.

Capital flight was seen as a major risk for China at the start of 2017, but a combination of tighter capital controls and a faltering dollar helped the yuan stage a strong turnaround, bolstering confidence in the Chinese economy.

In 2017, China’s reserves rose for the first time since 2014 and cross-border capital flow went from net outflow to basically stable. China’s foreign exchange regulator said in late March that it expected crossborder capital flows to remain basically stable this year.

The Chinese currency rose 0.8 percent against the US dollar in March and posted its biggest quarterly gain in a decade in the first quarter.

Caitong International attributed the yuan’s strength partly to the new crude oil futures in Shanghai, which the brokerage said had increased market demand for the yuan from foreign investors.

In 2017, the yuan rose around 6.8 percent against the greenback, reversing three straight years of depreciation.

The Trump administration had already slapped hefty tariffs on steel and aluminum imports when it announced 25 percent tariffs on another 1,300 Chinese products on Tuesday (US time) in an attempt to force China to cut its trade surplus with the US.

In response, China introduced tariffs of up to 25 percent on 128 US products including frozen pork, as well as on wine and certain fruit and nuts since April 2.

The looming specter of a trade war between the two countries fueled expectations that China may be happy to see a stronger yuan at this stage to defuse tensions with the US government.

The value of China’s gold reserves rose to $78.419 billion at the end of March, from $78.064 billion at the end of February.