China's FX Reserves End Yearlong Rising Streak on Valuations

(Bloomberg) -- China's foreign currency holdings decreased for the first time in more than a year, as rising U.S. Treasury yields weighed on valuations.

Key Points

• Reserves fell $27 billion to $3.13 trillion in February, the People's Bank of China said Wednesday
• That missed the $3.16 trillion median estimate in Bloomberg's survey

Big Picture

China's stockpile, the world's largest, increased last year for the first time since 2014 as robust economic growth boosted confidence in the yuan and trade remained upbeat. Still, U.S. trade tensions and tax cuts may renew capital outflow pressure in China and other emerging-market economies.

Economist Takeaways

“Negative foreign-exchange valuation effects accounted for most of the drop,” said Khoon Goh, head of research at Australia and New Zealand Banking Group Ltd. in Singapore. “Perhaps some negative impact also from rising U.S. yields on their Treasury holdings as well contributed to the drop. There was no reason for the PBOC to be intervening in the FX market in February since there was no large depreciation pressure on the yuan.”

“The drop in reserves reflects almost entirely valuation changes,” said Dariusz Kowalczyk, a senior emerging-market strategist at Credit Agricole SA in Hong Kong and the most accurate forecaster in Bloomberg's survey for reserves in February. “U.S. Treasury yields and other core bond yields have risen lately and quite sharply, reducing their value in China's portfolio. Last month is likely to be a one-off.”

“Reserves will stay stable,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The data is a little bit lower than expected, but in a normal range, and there isn't much depreciation pressure in the market.”

The Details

• Falling asset prices and weak non-dollar currencies led to the decline in reserves, which are expected to remain stable overall, the State Administration of Foreign Exchange said in a statement with the data
• The yuan weakened against the dollar by 0.6 percent in February, the first monthly drop since September

--With assistance from Ran Li and Xiaoqing Pi

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net, Miao Han in Beijing at mhan22@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Jeff Kearns

©2018 Bloomberg L.P.

With assistance from Yinan Zhao, Miao Han