China’s capital outflow eased in February, with analysts saying the smallest decline in foreign exchange reserves for eight months will reduce anxiety over the country’s financial stability.
Central bank data released on Monday showed reserves fell $29bn last month to $3.2tn, sharply lower than the $99bn fall in January and a record $108bn drop in December.
Expectations of renminbi depreciation and concern about China’s slowing economy have fuelled unprecedented capital outflow since the country’s official reserves hit an all-time high of $3.99tn in June 2014. As renminbi selling pressure intensified, the central bank has drawn on its reserves to curb downward pressure on the exchange rate. But the renminbi recovered 0.3 per cent in February, reducing the need for intervention.
“The capital flight thesis — the notion that Chinese residents and companies are desperate to get money out of the country and will do so regardless of short-term movements in the exchange rate — is inconsistent with the February outflow,” wrote Michael Parker, head of Asia Pacific strategy at Sanford Bernstein in Hong Kong, in a note.
Analysts have warned that China may eventually be forced to scale back its market interventions in support of the renminbi to prevent reserves being depleted below safe levels. On Sunday a top central banker sought to reassure investors that China’s official reserves were composed exclusively of highly liquid assets.
The comments by Yi Gang, deputy governor of the People’s Bank of China, were a response to claims by some bearish investors who believe the central bank figures include assets such as foreign real estate and private equity, which cannot easily be deployed in currency markets.
Zhang Yu, economist at Minsheng Securities in Beijing, estimates that the People’s Bank of China spent an average of $15bn a day in the spot exchange-rate market to support the renminbi in February, down from as much as $50bn per day at the height of renminbi panic selling following the surprise devaluation of the currency last August. Her estimates are for gross outflows from reserves and do not include countervailing inflows from trade and foreign direct investment.