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China's April forex reserves drop for first time in 6 months

BEIJING (Reuters) - China’s foreign exchange reserves unexpectedly fell for the first time in six months in April, despite recent data that suggested the world’s second-largest economy is starting to steady in response to stimulus measures.

FILE PHOTO: A Benjamin Franklin U.S. $100 banknote and a Chinese 100 yuan banknote with late Chinese Chairman Mao Zedong are seen in this picture illustration in Beijing, China, January 21, 2016. REUTERS/Jason Lee/File Photo

The decline in China’s reserves, the world’s largest, was modest, however, falling $3.81 billion last month to $3.095 trillion, central bank data showed on Tuesday.

Economists polled by Reuters had expected reserves would rise $1.24 billion to $3.1 trillion.

The small drop in April was due to a firmer U.S. dollar and changes in prices of global assets that China holds, the foreign exchange regulator said in a statement.

Cross-border capital flows will be basically stable in future, the State Administration of Foreign Exchange said.

China’s foreign exchange reserves climbed by $22.24 billion in the first four months of this year, after dropping $67.24 billion in 2018.

For much of last year, global investors worried about the risk of capital flight as the Chinese economy cooled, and debated how much Beijing would allow the yuan currency to weaken, though strict capital controls kept outflows in check.

Unexpectedly strong March data had suggested the economy was slowly getting back on steadier footing, but a sudden escalation in U.S.-China trade tensions this week has put the yuan back under pressure and revived concerns over Chinese growth.

China’s central bank said on Monday it will cut reserve requirement ratios for some small and medium-sized banks, in a targeted move to help small firms struggling amid the economic slowdown.

In April, the yuan fell 0.3 percent against the dollar, while the dollar inched up 0.2 percent against a basket of major currencies .

The yuan fell 5.3 percent against the dollar last year as trade relations with the United States deteriorated and the Chinese economy slowed. Despite sharp losses on Monday following fresh U.S. tariff threats, the yuan is still up 1.6 percent against the dollar so far this year.

More structural issues are also starting to come into play for the currency. China’s current account is slowly swinging from a decades’ long surplus towards a deficit, signalling a major shift in capital flows into and out of the country which could make the yuan exchange rate more volatile.

The OECD said last month that China’s current account may swing to a deficit of 0.1 percent of GDP this year from a small surplus in 2018, amid its rebalancing towards domestic demand.

With the economy increasingly reliant on domestic consumption rather than exports, China is no longer amassing dollars at a rapid rate.

The value of China’s gold reserves fell to $78.35 billion from $78.525 billion at end March. But they continued to grow in size, rising to 61.1 million fine troy ounces from 60.620 million ounces in March.

Reporting by Kevin Yao; Editing by Kim Coghill