January’s Slower Forex Reserve Decline Reflects Eased Capital Outflows, Beijing Says

(Beijing) — China’s capital outflows have eased and the yuan’s value will remain “stable,” the central government said, an apparent bid to soothe concerns after the country’s foreign exchange reserves dipped below the closely watched $3 trillion mark in January for the first time in nearly six years.

China’s efforts to support the yuan have seen its stockpile of foreign currency — the world’s biggest — dwindle, stoking fears that Beijing may be forced to let its currency depreciate greatly. Such a move could destabilize global markets and incite a political backlash from major trading partners.

Foreign exchange reserves in January fell more than analysts expected, to $2.9982 trillion, breaking the psychological “comfort level” of $3 trillion for the first time since February 2011 and prompting the government to rush to reassure investors.

China’s State Administration of Foreign Exchange (SAFE) claimed in a statement published on Tuesday shortly after the figure was released that “capital outflows have slowed from before” as the decline in the foreign exchange pool last month narrowed significantly on both a yearly and monthly basis.

However, SAFE added, “cross-border capital flows will balance out in the future with the gradually strengthening growth momentum of the Chinese economy.” Economic expansion recorded a stronger-than-expected rate of 6.8% in the last three months of 2016, picking up from a 6.7% gain in the preceding nine months.

China has maintained medium- to high-speed growth, a surplus in its current account, a healthy fiscal situation, and a stable financial system, SAFE said.

“All those positive factors will continue to underpin the yuan as a stable strong currency and help keep the size of foreign exchange reserves at a reasonable and abundant level,” it said.

SAFE blamed January’s decrease in foreign exchange reserves mainly on Chinese tourists’ overseas spending during the Spring Festival holiday, which began on Jan. 27, and companies’ demand for foreign money to repay debts before the Lunar New Year.

It was “unnecessary to pay special attention to round-number thresholds,” the foreign exchange regulator said.

Experts have attributed the slowdown in the decline of foreign exchange reserves last month to a weakened U.S. dollar and stepped-up efforts by Chinese authorities to contain capital outflows.

China’s government in recent months has tightened restrictions on domestic companies’ investment overseas and increased the cost of borrowing yuan in the offshore market to clamp down on short selling of the Chinese currency.

It has also required banks to strengthen scrutiny of individuals’ requests for foreign currency, which has provoked complaints over the rigmarole of answering questions about where and how money will be spent, the protracted time to get cash, and even rejection of applications.

Analysts with investment bank China International Capital Corp. Ltd. argued that foreign exchange outflows actually widened to $37.5 billion in January from $30.9 billion in December if the effect of the dollar’s losses against currencies such as the euro and the yen last month were taken into account, mainly due to increased personal purchases.

But there is “limited room for further decline in China's FX reserves” given the central bank’s stricter outflow controls. Meanwhile, inflows may rise as expectations on the yuan’s devaluation could wane if economic and policy setting becomes more stable and predictable, and if robust economic activity into 2017 tapers monetary easing in the country, they added.

Estimates about the adequate level of China’s foreign exchange reserves vary according to different evaluation metrics.

The International Monetary Fund has suggested a minimum stockpile of $1.7 trillion is enough for the country to meet its international payment needs as long as Beijing maintains its capital account restrictions, according to some analysts. The figure would rise to $2.8 trillion without Beijing’s capital account restrictions.

Speculation on greater returns on dollar assets as the greenback strengthens and pessimism about China’s growth have encouraged capital outflows, driving down the value of the yuan, which lost about 6.5% of its value against the dollar last year. Pessimism about the yuan could become a self-fulfilling prophesy because as the yuan depreciates, more people will want to convert their wealth into dollars, further weakening the Chinese currency.

Beijing has been allowing its currency to weaken in a controlled manner since 2015 to buffer pressures from capital flight and a strong dollar while also trying to maintain confidence in the yuan to reduce further cash outflows.

Contact reporter Fran Wang (fangwang@caixin.com)