China's for­eign re­serves slow de­cline as cur­rency sta­bi­lizes

The Pak Banker - - FRONT PAGE -

China's for­eign-ex­change re­serves fell at a slower pace last month as the na­tion's fi­nan­cial mar­kets sta­bi­lized and pol­icy mak­ers took more steps to­ward shoring up growth. The world's largest cur­rency hoard dropped by $28.6 bil­lion to $3.2 tril­lion in Fe­bru­ary, the Peo­ple's Bank of China said in a state­ment Mon­day. That was the small­est de­cline since June and less than the $40.9 bil­lion de­crease ex­pected by econ­o­mists sur­veyed by Bloomberg, who had a me­dian pro­jec­tion that re­serves would fall to $3.19 tril­lion.

China's yuan ad­vanced in Fe­bru­ary against the dol­lar af­ter three months of de­clines, and a do­mes­tic stock rout eased, helped in part by a move by pol­icy mak­ers to re­as­sure that they will pre­vent a hard land­ing. Lead­ers gath­er­ing for the an­nual Na­tional Peo­ple's Congress say they're tar­get­ing a wider fis­cal gap for 2016 to help meet a slightly lower growth tar­get.

"The govern­ment has shown clear pol­icy sig­nals to sta­bi­lize the cur­rency," said Xu Gao, chief econ­o­mist at Ever­bright Se­cu­ri­ties Co. in Bei­jing. "This ef­fec­tively curbed mar­ket ex­pec­ta­tions for fur­ther de­pre­ci­a­tion, and the mar­ket has grad­u­ally un­der­stood."

Pol­icy mak­ers have been burn­ing through their stock­pile to help sta­bi­lize the cur­rency, a key goal for China's lead­ers, who are gath­er­ing this week for their an­nual pol­icy meet­ing in Bei­jing. The na­tion's de­fense of the yuan de­pleted its for­eign re­serves by $513 bil­lion last year, while Bloomberg In­tel­li­gence es­ti­mates that a record $1 tril­lion of money moved over­seas in 2015.

Per­sis­tent cap­i­tal out­flows from China since mid-2014 were prob­a­bly driven more by lo­cal com­pa­nies pay­ing down dol­lar-de­nom­i­nated debt in an­tic­i­pa­tion of a stronger U.S. cur­rency than by in­vestors ditch­ing as­sets, ac­cord­ing to the Bank for In­ter­na­tional Set­tle­ments. PBOC Deputy Gov­er­nor Yi Gang said at a news briefing Sun­day in Bei­jing that re­serves will stay at a "rea­son­able level," but a fur­ther drop wouldn't be sur­pris­ing. He re­it­er­ated that the yuan will be sta­ble against a bas­ket of cur­ren­cies, and there's no ba­sis for a per­sis­tent de­pre­ci­a­tion in the cur­rency. Premier Li Ke­qiang's work re­port de­liv­ered Satur­day at the start of the an­nual Na­tional Peo­ple's Congress showed the govern­ment will give top pri­or­ity to de­vel­op­ment by boost­ing in­no­va­tion, ur­ban­iz­ing more and cut­ting ex­cess ca­pac­ity in in­dus­tries like coal and steel. He also out­lined a 6.5 per­cent to 7 per­cent tar­get range for eco­nomic growth, with 6.5 per­cent as the base­line through 2020. Last year's ex­pan­sion was 6.9 per­cent. To reach the new tar­get, China plans to per­mit a record high fis­cal deficit and has raised its money sup­ply ex­pan­sion tar­get. That means debt grows even as growth slows. China's lead­ers also are work­ing to rein in risks to the econ­omy. Reg­u­la­tors plan to im­pose new rules to end the prac­tice of home buy­ers tak­ing out loans to cover down-pay­ments, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter. The rules will bar lenders in­clud­ing de­vel­op­ers and hous­ing agen­cies from of­fer­ing loans for down-pay­ments, said the peo­ple, who asked not to be named be­cause the mat­ter isn't yet pub­lic.

Still, more de­clines may be in store, ac­cord­ing to Zhao Yang, chief China econ­o­mist at No­mura Hold­ings Inc. in Hong Kong. China will in­ter­vene in the cur­rency mar­ket less in the short term, yet may need to do so more later this year if volatil­ity re­turns, Zhao said.

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