China February FX reserves fall to $3.20 trillion, lowest since late 2011

March 7, 2016 09:22 AM

China's foreign exchange reserves fell $28.57 billion in February, slightly less than expected and easing from January's slump, suggesting the central bank is scaling back its interventions to support the yuan as capital outflows slow.

Still, China's foreign reserves declined for a fourth straight month, and the $3.20 trillion at the end of February was the lowest level since December 2011, data from the People's Bank of China showed on Monday.

Economists polled by Reuters had predicted reserves would fall $30 billion from $3.23 trillion at the end of January.

China's reserves are still the world's largest, but it has been burning through them at such a pace that some analysts believe Beijing might soon have to allow a sharp fall in the value of the yuan or back-pedal on liberalization and tighten capital controls.

"It shows that outflows did slow down somewhat, but there are a lot of factors," said Yang Zhao, chief China economist at Nomura in Hong Kong

The yuan steadied in February after volatile moves in December and January, helped in part by a weaker dollar as expectations of U.S. interest rate hikes faded, Zhou said.

There may also have been an impact from the long Lunar New Year holidays in early February, when many firms close for extended periods and business activity slows, he added.

"The central bank and other top officials have repeatedly expressed a desire for stabilization and said there's no basis for large scale depreciation in the yuan. Equally important, the market has quickly downgraded expectations for a rapid lift-off (in interest rates) by the U.S. Federal Reserve."

Capital outflows from China have increased since its surprise devaluation of the yuan last August, and have been fanned by concerns about its economic slowdown and expectations of higher U.S. rates. That has prompted the central bank to sell dollars in the currency markets to support the yuan and crack down on forex trading which it suspected to be speculation.

China's reserves sunk $99.5 billion in January and $107.9 billion in December, the biggest monthly drop on record. For 2015 as a whole, its reserves fell $513 billion, the largest annual drop in history.

"In February the government instituted a lot of administrative measures, which may have been able to slow down the outflows," Kevin Lai, chief economist of Asia ex-Japan at Daiwa Capital Markets said, in a note.

Heavy outflows of funds from China in recent months may also have been exaggerated by Chinese companies rushing to repay dollar-denominated debt, rather than widespread capital flight,

The Bank of International Settlements (BIS) said on Sunday, a view that has also been raised by China's central bank governor.

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