China FX reserves rise to eight months high in June

China's foreign exchange reserves edged up in June for a fifth consecutive month, in line with market expectations, as capital outflows eased in the face of tighter regulations and the dollar's rally paused. Reserves rose $3.2 billion during June to $3.057 trillion, in line with economists' forecast in a Reuters poll. The reserves rose by $24 billion in May to $3.054 trillion.
It was the first time that reserves had climbed for five months in a row since June 2014, and marked its highest level in eight months. "China's foreign exchange reserves suggest that outflow pressures may have eased last month," wrote Julian Evans-Pritchard, China economist at Capital Economics, adding that June could mark the first month since October 2015 in which the PBOC was a net buyer of foreign exchange. He estimated that China's capital outflows dropped to roughly $10 billion in June from $29 billion in May.
The country's foreign exchange regulator said that the slight increase in reserves in June was driven by stronger non-dollar currencies against the greenback. China's foreign reserves will remain stable as cross-border capital flows become more balanced, the State Administration of Foreign Exchange (SAFE) said in a statement following the data release. China burned through nearly $320 billion of reserves last year but the yuan still fell about 6.5 percent against the dollar, its biggest annual drop since 1994.
Faced with an entrenched bearish yuan view, Beijing moved swiftly over the past few months to flush out speculators, quash expectations of a further steep depreciation and safeguard its reserves. That strategy to head off risks to the economy from capital outflows seems to have worked so far, with the yuan up about 2 percent against the dollar this year. In May, net foreign exchange sales by the People's Bank of China (PBOC) fell to the lowest in nearly two years as the yuan stabilised.
China also recorded a surplus in its capital and financial account in the first quarter, data from the foreign exchange regulator showed, indicating net capital inflows as policymakers tightened supervision of outflows. However, French investment bank Natixis said in a report that its capital flow tracker for China showed outflows for the second quarter will rise to $144.1 billion, reversing the trend in the first quarter.