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China’s FX reserves rise to 9-month high in July

Reuters BEIJING (Reuters) — China’s foreign exchange reserves rose twice as much as expected in July to a nine-month high as tighter regulations and a weaker dollar keep capital outflows in check.

A dramatic reduction in capital outflows — which are seen as one of China’s biggest risks — has helped boost confidence in its economy this year as policymakers preach stability ahead of a key political leadership reshuffle in coming months.

China’s forex reserves, the world’s largest, rose $24 billion in July to $3.081 trillion, compared with an increase of $3.2 billion in June, central bank data showed on Monday.

It was the first time that China’s reserves had climbed for six months in a row since June 2014, and lifted them to the highest level since last October.

The country’s foreign exchange regulator said weakness in the dollar helped push up the value of non-dollar currencies in its holdings. The euro, in particular, gained more than 3 percent against the greenback last month.

Excluding those valuation effects, China’s reserves would have fallen by $5.2 billion in July, China Merchants Securities economists estimated in a research note following the data.

China burned through nearly $320 billion of reserves last year, but the yuan still fell about 6.5 percent against the surging dollar, its biggest annual drop since 1994.

ING economist Iris Pang estimated outflows eased to about $10 billion in July.

Such a modest level should reduce any pressures on the yuan for the rest of the year, she said, while adding she does not expect authorities to relax restrictions on capital outflows anytime soon.

China’s forex pile fell below the closely watched $3 trillion level in January for the first time in nearly six years, raising market fears that Beijing may devalue its currency to relieve the pressure.

But the yuan has rebounded more than 3 percent so far this year, thanks largely to a reversal in the dollar, tougher policing of outflows and fresh steps by the central bank to flush out speculators who were betting the currency would continue to fall.

The yuan strengthened around 0.8 percent against the dollar in July, its third straight month of gains.

The strong rebound “has changed market expectations to yuan appreciation [from depreciation],” said ING’s Pang.

In the first half of the year, Chinese commercial banks sold a net $93.8 billion of foreign exchange, down 46 percent from the same period last year.

“The balance in the foreign exchange market in the first half of the year was the best in three years,” the State Administration of Foreign Exchange (SAFE) said last month, adding that it expected cross-border flows to remain stable due to the country’s strong economic performance and more benign conditions globally.

Targeting investments

In addition to clamping down on outflows since late last year via administrative measures, Beijing has more recently taken aim at some overseas investments by Chinese firms as it looks to keep the yuan on a more even keel.

China’s non-financial outbound direct investment (ODI) fell by nearly half in the first half of 2017 as the tighter capital restrictions began to bite.

Reuters reported in July that China’s regulators have told banks to stop providing funding for several of Dalian Wanda Group’s overseas acquisitions as Beijing looks to curb the conglomerate’s offshore buying spree.

Authorities will “severely crack down on underground banks and other foreign exchange violations to prevent and resolve risks from cross-border capital flows,” the forex regulator said in an internal meeting last month.

SAFE reiterated that it will back legitimate overseas investments by domestic firms and will continue to monitor overseas investments in property, hotel, entertainment, sports and movie industries.

Combined, the more stringent regulatory measures, a weaker dollar and pressure on acquisition hungry domestic firms have helped pull the yuan away from the 7 to the dollar mark which is believed to be closely watched by China’s top policymakers.

Still, in 12 months’ time the yuan is expected to have erased most of the gains made this year, providing the U.S. Federal Reserve sticks to a gradual policy tightening path, boosting the dollar, a Reuters poll showed last week.

From current levels around 6.72, the yuan is forecast to weaken to 6.85 in six months and 6.90 in a year, according to the poll of over 60 foreign exchange analysts taken July 27 to Aug 2.

The value of China’s gold reserves rose to $75.084 billion at end-July, from $73.585 billion at end-June.

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