China Forex Reserves Climb to Highest Level in Nearly a Year -- Update

Features Dow Jones Newswires

China's foreign-exchange reserves rose last month to their highest level in nearly a year, giving Beijing a breather in its campaign to constrain capital outflows.

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The reserves increased by $16.98 billion in September from the previous month to $3.109 trillion, the eighth straight month of gains and the highest level since October 2016, data from the People's Bank of China showed Monday.

Economists said the larger-than-expected increase likely came from stronger global demand for Chinese exports and Beijing's success in using capital controls to stanch the flow of capital offshore and shore up the yuan. They and the State Administration of Foreign Exchange also cited changes in the values of the dollar and other currencies and assets.

The increase was large enough, some economists said, that China may also have seen a real net inflow of capital--unlike August's $10.81 billion gain, which was largely due to changes in asset values. "If that's the case, then that would be a notable reverse from August, which still saw net outflows," said Ning Zhang, an economist at UBS.

In September, changes in the value of major assets in China's reserves should likely have produced a net decline, Mr. Zhang and other economists said. A selloff of U.S. Treasurys last month--the benchmark 10-year note fell more than 1%--would have had negative effects on the rest of China's dollar-denominated assets, they said.

China tightened scrutiny on capital movements starting last year to reduce outflows, after burning through a trillion dollars in reserves to keep the yuan from cratering. Meanwhile, a weaker dollar has helped strengthen the yuan and reduced Beijing's need to dig deeper into reserves.

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Policy makers last month scrapped a rule that made it more expensive for traders to bet against the yuan after the currency hit a 17-month high earlier in September, a sign that they were more comfortable about letting it move more freely.

The increase in China's forex reserves last month suggests "active intervention" by the PBOC to inject two-way volatility into the exchange rate, said Julian Evans-Pritchard, an economist at Capital Economics.

The yuan ended September weaker against the dollar compared with the start of the month, ending four straight months of gains. That recovery in the dollar probably encouraged more Chinese exporters to sell dollars they have accumulated over the past two years, Standard Chartered economists said in a research note.

Liyan Qi and Grace Zhu

(END) Dow Jones Newswires

October 09, 2017 07:57 ET (11:57 GMT)