March 7, 2018 / 8:54 AM / a year ago

UPDATE 1-China FX reserves fall in February, first drop in 13 months

    * China's FX reserves fall $27 bln in February
    * Economists polled by Reuters expected reserves to drop by
$1 bln
    * Regulator says decline due to global currency rate
    * Rising U.S. rates could pressure yuan, revive outflow

    BEIJING, March 7 (Reuters) - China's foreign exchange
reserves fell in February, posting their first decline in 13
months, as the yuan weakened against the U.S. dollar amid wild
swings in global financial markets.   
    Reserves fell $27 billion to $3.134 trillion, compared with
an increase of $21.5 billion in January, central bank data
showed on Wednesday. 
    Economists polled by Reuters had expected reserves to drop
by $1 billion in February to $3.160 trillion.    
    The State Administration of Foreign Exchange (SAFE) said
adjustments in the value of China's holdings of non-dollar
currencies and assets led to the decline for the month, adding
that the size of its foreign exchange reserves will remain
basically stable.
    "Our model suggests that the PBOC largely remained on the
sidelines, with most of the decrease in the value of reserves
due to exchange rate movements," Capital Economics' Senior China
Economist Julian Evans-Pritchard wrote in a note, referring to
whether the central bank intervened in markets last month. 
    Capital flight was seen as a major risk for China at the
start of 2017, but a combination of tighter capital controls and
a faltering dollar helped the yuan stage a strong turnaround,
restoring confidence in the economy.
    China's reserves rose for the first time last year since
2014. They had slumped nearly $1 trillion to $2.998 trillion by
January 2017 as authorities sought to shore up the yuan and
reduce potentially destabilising capital outflows. 
    Last year was a turning point as China's cross-border
capital flows went from net outflows to stable, SAFE spokeswoman
Wang Chunying told reporters in January.              
    The yuan rose around 6.8 percent against the greenback in
2017, reversing three straight years of depreciation. 
    The gains stretched into this year, with January's 3.5
percent rise the yuan's best monthly performance since 1994. But
the currency weakened 0.6 percent to the dollar in February in
its first monthly drop since September.            
    February's dollar gains were triggered by views that the
U.S. central bank could raise interest rates at a faster pace,
but the greenback has wilted again this month as President
Donald Trump's plans to impose tariffs on imported steel and
aluminium spark fears of a global trade war.            
    "If concerns about U.S. protectionism continue to build, it
will weaken global investors' appetite for emerging market
assets," said Evans-Pritchard, who also argued that slower
growth in China will likely trigger unexpected Chinese rate cuts
this year. 
    "In both cases, capital outflows from China will likely pick
up. If the PBOC does not intervene, it would spark speculation
China wants the yuan to weaken, which would revive outflows and
depreciation pressure." 
    The U.S. Federal Reserve is widely expected to raise rates
again on March 21, a day after China's annual parliament meeting
is slated to end.
    In response, most market watchers believe the PBOC will make
small adjustments to the rates it charges for short- and
medium-term OMO loans, including 7-day reverse repurchase
    The value of China's gold reserves fell to $78.064 billion
at the end of February, from $79.675 billion at end-January.

 (Reporting by Yawen Chen and Kevin Yao; Additional Reporting by
Fang Cheng; Editing by Kim Coghill)
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