China's Forex Reserves Rise for Fifth Straight Month -- Update

Features Dow Jones Newswires

China's massive foreign-exchange reserves rose for a fifth straight month, edging up slightly from last month, as a weaker U.S. dollar and Beijing's stringent controls over moving money offshore helped arrest outflows.

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The reserves increased by $3.22 billion in June from the previous month to $3.057 trillion, according to figures from the People's Bank of China released Friday. The increase paled next to May's $24.03 billion gain and was smaller than the $11 billion rise forecast by economists polled by The Wall Street Journal.

China's foreign-exchange regulator attributed June's pickup in part to the dollar's weaker value, which raised the valuation of other currencies in the reserves, and to the "steady supply and demand for foreign currency."

Economists said the rise in value of other currencies in the reserves helped to balance out a decline in the prices of U.S. and Japanese government bonds. They also cited the tightened capital controls imposed late last year to stem an outflow of money as another factor in the June increase and said investors are now divided on whether the yuan would rise or fall in value against the dollar.

"Market expectations on the yuan have started to diverge lately after Beijing won some success this year in curbing capital outflows and stabilizing the Chinese currency," said Larry Hu, an economist with Macquarie Research.

After burning through nearly $320 billion of its foreign-exchange hoard last year to keep the yuan from depreciating too rapidly, China's central bank has made stabilizing the currency a top priority and closed off channels for businesses and individuals to send money out of the country.

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In its latest move to change tactics and keep traders guessing about the yuan's value, the central bank in May tweaked its mechanism for setting the currency's daily rate against the dollar. The addition of what it called the "counter-cyclical" factor gave the bank greater control in setting the daily reference rate and sent a message to investors that the bank is committed to a stronger yuan, economists said.

Meanwhile, the central bank also intervened in the offshore market for the yuan, which is centered in Hong Kong, by jacking up borrowing costs for the currency and thereby making it more expensive to bet on the yuan's depreciation.

As a result, many analysts have recently revised their forecasts for the yuan, with some now predicting a smaller decline or even a gain this year.

Macquarie's Mr. Hu said that even if the yuan ends up depreciating against the dollar this year, Beijing has regained control over the cross-border capital flows.

"The real problem now is how to withdraw from its current interventions and capital controls without triggering a flood of outflows," said Mr. Hu.

--Grace Zhu

(END) Dow Jones Newswires

July 07, 2017 07:11 ET (11:11 GMT)