China FX reserves rise as yuan fully recovers from 2016

CHINA’S foreign reserves edged up in August for a seventh straight month, and rose US$10.5 billion in August to US$3.092 trillion, compared with an increase of US$24 billion in July.

It is the first time China’s reserves have climbed for seven months in a row since June 2014, and this marked the highest level since October last year.

China has tightened rules on moving capital outside the country since late last year. It sought to support the yuan and stem a slide in its foreign exchange reserves. It burned through nearly US$320 billion of reserves last year and the yuan still fell about 6.5 per cent against the surging dollar, its biggest annual drop since 1994.

However, the yuan has been made a sharp recovery this year, driven by the reversal in the US dollar and a further widening of Beijing’s forex controls, including a clampdown on some outbound investment.

The Chinese denominated currency appreciated two per cent in August and has now recouped last year’s losses.

Analysts believe that there is still room to run for the currency. Yuan has strengthened more than 2,000 pips since the beginning of August, taking its gain to 6.5 per cent so far this year, making its best month in 2017.

However, the upward momentum has slowed down slightly last week.

Asian currencies have been depreciating in the face of rising political tensions between the US and North Korea, but the Chinese yuan is still appreciating.

The People Bank of China (PBOC) has succeeded in demonstrating that it can withstand downward pressure on the currency by tightening capital controls and with foreign exchange intervention.

According to Capital Economics which was issued in late August, the yuan is expected to trade at 6.60 for a US dollar by the end of 2017, 6.40 in 2018, and 6.20 in 2019.

Surprisingly, the spot rate for yuan was at 6.5311 on last Wednesday, beating the firm’s forecast only a week out of its latest revision.

Macquarie also expects the yuan to appreciate further, forecasting it to hit 6.40 yuan against the US dollar over the next 12 months.

Economists believe that PBOC would likely keep the yuan on a rising trend in a longer term, albeit at a slower speed, to keep the net inflow positive. We expect that there will still be tight controls on outflows for the foreseeable future, even though the yuan has stabilised in recent months.