After three months of worrisome declines, China’s foreign exchange reserves surprised the markets and rose in March, the People’s Bank of China reported on Thursday.
China’s foreign exchange reserves — the world’s largest – climbed $10.26 billion to $3.21 trillion last month from $3.20 trillion in February. This was a dramatic turnaround from the Reuters poll forecast of a decline to $3.18 trillion. Reserves hit a peak $3.99 trillion in June 2014.
It was the first monthly advance since November. The gain was attributed to pressure on the yuan easing because of the declining likelihood that US would be raising interest rate hikes soon.
“Looking ahead, we believe that the pressure on yuan will moderate somewhat, while the capital outflows are likely to continue over the foreseeable future,” Zhou Hao, senior emerging markets economist at Commerzbank in Singapore told Reuters.
China’s foreign reserves fell by $28.57 billion in February, after plunging $99.5 billion in January and $107.9 billion in December, the biggest monthly drop on record.
Analysts believed the March rise was partly due to favorable currency valuation effects. Both the euro and Japanese yen strengthened against the US dollar last month.
Zhou told Reuters that the valuation effect was about $30 billion in March, implying net outflows in the month.
However the big change was that the US Federal Reserve Bank has indicated that it will temper the fast pace of interest rate hikes that it had projected in December. Last week, Fed Chair Janet Yellen said that the U.S. central bank should proceed cautiously. The comments cause a retreat in the dollar’s value helping to moderate China’s capital outflows.
Of course, if the US dollar rises, the yuan will come under renewed downward pressure, a policy adviser to the People’s Bank of China said last month.
“The currency policy changes put in place after mid-January are showing a strict adherence to the basket peg. It is a more disciplined policy,” Tim Condon, head of Asia research at ING in Singapore told Reuter. “The Chinese government sees the narrowing of the foreign reserve declines as a welcome side effect of the policy.”