Bar­clays re­leases Q3 2017 ‘Com­pass’ re­search re­port

Kuwait Times - - BUSINESS -

China’s for­eign ex­change re­serves rose twice as much as ex­pected in July to a nine-month high as tighter reg­u­la­tions and a weaker dol­lar keep cap­i­tal out­flows in check.

A dra­matic re­duc­tion in cap­i­tal out­flows - which are seen as one of China’s big­gest risks - has helped boost con­fi­dence in its econ­omy this year as pol­i­cy­mak­ers preach sta­bil­ity ahead of a key po­lit­i­cal lead­er­ship reshuf­fle in com­ing months. China’s forex re­serves, the world’s largest, rose $24 bil­lion in July to $3.081 tril­lion, com­pared with an in­crease of $3.2 bil­lion in June, cen­tral bank data showed yes­ter­day. It was the first time that China’s re­serves had climbed for six months in a row since June 2014, and lifted them to the high­est level since last Oc­to­ber.

The coun­try’s for­eign ex­change reg­u­la­tor said weak­ness in the dol­lar helped push up the value of non-dol­lar cur­ren­cies in its hold­ings. The euro, in par­tic­u­lar, gained more than 3 per­cent against the green­back last month.

Ex­clud­ing those val­u­a­tion ef­fects, China’s re­serves would have fallen by $5.2 bil­lion in July, China Mer­chants Se­cu­ri­ties econ­o­mists es­ti­mated in a re­search note fol­low­ing the data.

China burned through nearly $320 bil­lion of re­serves last year, but the yuan still fell about 6.5 per­cent against the surg­ing dol­lar, its big­gest an­nual drop since 1994. ING economist Iris Pang es­ti­mated out­flows eased to about $10 bil­lion in July. Such a mod­est level should re­duce any pres­sures on the yuan for the rest of the year, she said, while ad­ding she does not ex­pect au­thor­i­ties to re­lax re­stric­tions on cap­i­tal out­flows any­time soon.

China’s forex pile fell be­low the closely watched $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 yuan has re­bounded more than 3 per­cent so far this year, thanks largely to a re­ver­sal in the dol­lar, tougher polic­ing of out­flows and fresh steps by the cen­tral bank to flush out spec­u­la­tors who were bet­ting the cur­rency would con­tinue to fall. The yuan strength­ened around 0.8 per­cent against the dol­lar in July, its third straight month of gains.

The strong re­bound “has changed mar­ket ex­pec­ta­tions to yuan ap­pre­ci­a­tion (from de­pre­ci­a­tion),” said ING’s Pang. In the first half of the year, Chi­nese com­mer­cial banks sold a net $93.8 bil­lion of for­eign ex­change, down 46 per­cent from the same pe­riod last year.

“The bal­ance in the for­eign ex­change mar­ket in the first half of the year was the best in three years,” the State Ad­min­is­tra­tion of For­eign Ex­change (SAFE) said last month, ad­ding that it ex­pected cross-bor­der flows to re­main sta­ble due to the coun­try’s strong eco­nomic per­for­mance and more be­nign con­di­tions glob­ally.

In ad­di­tion to clamp­ing down on out­flows since late last year via ad­min­is­tra­tive mea­sures, Bei­jing has more re­cently taken aim at some over­seas in­vest­ments by Chi­nese firms as it looks to keep the yuan on a more even keel. China’s non­fi­nan­cial out­bound di­rect in­vest­ment (ODI) fell by nearly half in the first half of 2017 as the tighter cap­i­tal re­stric­tions be­gan to bite.

Reuters re­ported in July that China’s reg­u­la­tors have told banks to stop pro­vid­ing fund­ing for sev­eral of Dalian Wanda Group’s over­seas ac­qui­si­tions as Bei­jing looks to curb the con­glom­er­ate’s off­shore buy­ing spree. Au­thor­i­ties will “se­verely crack down on un­der­ground banks and other for­eign ex­change vi­o­la­tions to pre­vent and re­solve risks from cross-bor­der cap­i­tal flows”, the forex reg­u­la­tor said in an in­ter­nal meet­ing last month.

The SAFE re­it­er­ated that it will back le­git­i­mate over­seas in­vest­ments by do­mes­tic firms and will con­tinue to mon­i­tor over­seas in­vest­ments in prop­erty, ho­tel, en­ter­tain­ment, sports and movie in­dus­tries. Com­bined, the more strin­gent reg­u­la­tory mea­sures, a weaker dol­lar and pres­sure on ac­qui­si­tion hun­gry do­mes­tic firms have helped pull the yuan away from the 7 to the dol­lar mark which is be­lieved to be closely watched by China’s top pol­i­cy­mak­ers.

Still, in 12 months’ time the yuan is ex­pected to have erased most of the gains made this year, pro­vid­ing the US Fed­eral Re­serve sticks to a grad­ual pol­icy tight­en­ing path, boost­ing the dol­lar, a Reuters poll showed last week. From cur­rent lev­els around 6.72, the yuan is fore­cast to weaken to 6.85 in six months and 6.90 in a year, ac­cord­ing to the poll of over 60 for­eign ex­change an­a­lysts taken July 27-Aug 2. The value of China’s gold re­serves rose to $75.084 bil­lion at end-July, from $73.585 bil­lion at end-June. — Reuters

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