China's reserves rise for 4th month

By JOE McDONALD Markets Associated Press

China's foreign currency reserves rose in May for a fourth month ahead of a possible U.S. interest rate hike that might put new pressure on Beijing's exchange rate controls.

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The reserves, the world's biggest, increased $24 billion to $3.05 trillion, according to government data released Wednesday.

A sharp decline last year prompted Beijing to tighten controls on the outflow of money from the world's second-largest economy.

The Chinese controls could face a new test if the U.S. Federal Reserve decides at a meeting next week to raise interest rates. That would draw money out of China in search of higher returns, which could require Beijing to raise its own interest rates or further tighten controls.

The Fed has signaled it expects to raise rates a total of three times this year to ensure tighter labor markets do not trigger inflation pressures.

The central bank spent reserves to shore up the yuan's exchange rate after expectations that the Chinese currency would decline prompted investors to move money out of the country starting in 2015.

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The reserves declined from a peak of $3.99 trillion in June 2014 to just under $3 trillion late last year. Late last year, the net outflow was tens of billions of dollars a month, which prompted Beijing to step up scrutiny of proposed foreign investments and ban some activities by individual investors.

"Though the large capital outflow appears to have eased notably, the authorities have no intention to loosen capital control yet," said Citigroup economists Li-Gang Liu and Xiaowen Jin in a report.

In its latest tactic, the foreign currency regulator announced Friday that Chinese banks must report all overseas automatic teller or credit card transactions above 1,000 yuan ($150) by their customers beginning Sept. 1.

The tighter controls have temporarily set back Beijing's gradual moves to encourage more use of the yuan abroad for trade.

The People's Bank of China bases the yuan's state-set exchange rate on a basket of currencies that is believed to be dominated by the dollar. That required Beijing to intervene to keep the yuan in line with the dollar as the greenback rose over the past two years.

The latest controls appear to have locked the yuan to the dollar, possibly to send a clear signal it won't fall further.

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People's Bank of China (in Chinese): www.pbc.gov.cn