Stable yuan lifts China's foreign currency reserves

China's foreign exchange reserves rose in March for the first time in five months as the value of the country's currency stabilized while capital outflows appear to have eased.

Data from the People's Bank of China (PBOC) released on Thursday show that foreign reserves advanced $10.3 billion last month to $3.21 trillion - the first gain since October. Reserves had fallen for four consecutive months until March and had declined more than $600 billion in the last year alone.

Investors had been moving funds out of China with concerns over slower-than-expected economic growth, stock market turmoil and a weakening yuan. However, the dollar weakened considerably in March amid indications the US central bank - the Federal Reserve - wouldn't be aggressive in raising interest rates. That made sending money overseas less attractive.

"Earlier, the fear of further renminbi (yuan) depreciation added to the capital outflow. The PBOC stabilized the F/X (forex or foreign exchange) market by assuring that there won't be a sharp depreciation of the RMB in the near future," Sung Won Sohn, professor of economics at California State University Channel Islands, said.

"In addition, the US central bank is not expected to hike the interest rate as fast as predicted before," Sohn said.

Tailan Chi, professor at the University of Kansas School of Business, said concern had eased over slowing growth in the Chinese economy.

Chi said since the rapid fall in stock prices in early January, the Chinese government has made several moves to assure the market.

The strategy that was outlined in the March two sessions to combine demand-side stimulation via increased government expenditures with supply-side adjustments to reduce overcapacity seemed more convincing than before, he said.

"The capital outflow is very much linked to renminbi depreciation expectations," Shen Jianguang, a China economist at Mizuho Securities, told The New York Times.

The increase suggests that "capital outflows from China have slowed due to a stabilizing yuan, tightened capital controls and depreciation of the dollar," said Zhou Hao, a Singapore-based economist at Commerzbank AG, Bloomberg reported. "Looking ahead, we believe that the pressure on the yuan will moderate somewhat."

"The bulk of speculative capital outflows have stopped for now," Sohn said. "However, slowing economic growth in China relative to the US economy and the possibility that the Federal Reserve might raise the interest rate faster than assumed could change the outlook."

Chi said that "in the meantime, many Chinese investors still want to diversify their portfolios into foreign currency-denominated assets."

"So, as the financial sector is further opened up, there will be additional capital outflows. Thus the process needs to be carefully managed."

paulwelitzkin@chinadailyusa.com