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

March 7, 2016 09:22 AM

Markets still see yuan weakening

On Monday, the central bank's vice governor said the nation's foreign exchange reserves are ample and reasonable, cross-border capital flows are manageable and China's economic fundamentals are sound. Governor Zhou Xiaochuan also said during a just-ended G20 meeting that changes in China's foreign reserves were normal.

Growing confidence among officials that they have snuffed out expectations of further yuan depreciation could free up the central bank for more aggressive monetary easing which the slowing economy deeply needs, ING economist Tim Condon said in a note before the reserve data, predicting it could cut interest rate again before the end of March.

But while outflows may cool as the yuan steadies, many analysts believe the central bank still faces a tough job keeping the yuan stable, especially as the economy faces persistent downward pressure.

Chinese officials insist they see no reason for further depreciation, but analysts polled by Reuters believe the yuan will weaken another 3.5% against the dollar over the next 12 months, though a sharp, one-off devaluation is not seen on horizon.

The yuan has weakened about 5% against the dollar since the August devaluation, but less against a basket of currencies, which China is increasingly referencing in hopes of making exchange rate movements less volatile.

China also said its gold reserves stood at $71.01 billion at the end of February, up from January's $63.57 billion.

By volume, gold reserves rose to 57.5 million troy ounces in February, up from 57.18 million at the end of January.

Worries about China's foreign exchange rate policy flared again in early January when the central bank suddenly allowed the yuan to slide sharply, raising fears it could set off a wave of competitive devaluations which could destabilize the global economy and financial markets.

But, as in the aftermath of the August devaluation, Chinese authorities quickly and forcefully intervened to head off a sharper slide.

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