China’s FX reserves rise surprisingly in March

In March, China’s FX reserves rose surprisingly by about USD 10 billion to USD 3212.6 billion, as compared with market projection for a decline of around USD 6 billion. According to Nordea Bank, rise in China’s FX reserves should not be seen as a rebound in confidence regarding the country’s outlook and that the outflows have halted for good.

Improved FX reserves numbers in China are because of two factors added Nordea Bank. Firstly, the US dollar declined 3.7% last month. If the US dollar assets still account for about 40% of total reserves, then this should have increased China’s FX reserves by USD 47 billion. But reserves grew less than USD 47 billion, implying that capital outflows continued last month, noted Nordea Bank.

Indeed, capital outflows have reduced lately, mainly due to stringent imposition of capital controls. The rise in reserves does not essentially indicate rebound in sentiment and halt of outflows. According to Nordea Bank, China has not done much to enhance transparency regarding FX policy and hence uncertainty continues to be high.

“If the stock market starts to free-fall again, a not unlikely risk scenario, this could trigger another round of sell-off of the CNY and intensified depreciation pressure. Hence, we remain cautious on our view of the USD/CNY and forecast 6.7 at the end of this year”, noted Nordea Bank.