A Sign for Recovery? China’s Forex Reserves Grow for the First Time in Five Months

Despite mounting concerns over capital outflows and currency depreciation, China’s foreign exchange reserves grew in March, the first time since last October. Data released by People’s Bank of China (PBOC) on Thursday shows that forex reserves increased an unexpected $10.2 billion to $3.21 trillion in March.  

A prevailing view on the risen forex reserves data is that Chinese economy shows a slight hope of recovery, accompanied by the improvement of manufacturing PMI data in March.  In addition, the Fed has signaled that an interest rate hike in April would be unlikely, with the dollar falling in recent weeks.   A stronger Yuan has helped alleviate the need to reduce foreign exchange reserves as well as ease the risk of capital flight. Zhou Xiaochuan, governor of PBOC, has also reinsured in mid-March that “China’s capital flows will quickly return to relatively calm and normal levels” and considered excessive monetary stimulus unnecessary.  

However, some market participants believe that the increase in forex reserves is unsustainable, particularly if the dollar strengthens again with anticipation of interest rate hikes, which would cause more capital outflows. Shen Jianguang, chief economist at Mizuho Securities Asia told Bloomberg that “The PBOC will maintain capital outflow restrictions,” and the recent signs of economic recovery are resulted from “massive fiscal and monetary easing”.

Previously, China’s forex reserves fell $28.6 billion in February and $99.5 billion in January. The US dollar to Chinese yuan exchange rate converts at 1 USD is 6.463 CNY as of this writing.

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