Analysts differ on forecasts for China's FX reserves

Capital outflows from China slowed significantly over the past two months, Capital Economics estimated, telling clients that the country's fight against them might be nearly over, but Oxford Economics disagreed.

Outward-bound flows had slowed from $161bn over the last three months of 2016 to $62bn in the first quarter of 2017, the former said, citing improved sentiment towards Chinese assets and the stability of the renminbi against the US dollar following the latest interest rate hike in the US.

"Looking ahead, outflow pressure may pick up later this year if, as we expect, the renminbi resumes its decline in the face of renewed global US dollar strength. But the muted market reaction to the US Fed’s latest rate hike suggests that any further dollar rally will be smaller than we've seen over the past couple of years. In that case, the PBOC may not have to fight large-scale capital outflows for much longer," said Julian Evans-Pritchard, China economist at Capital Economics.

Hence Chinese regulators decision this week to begin rolling-back their capital controls, by reportedly reducing restrictions on banks' cross-border yuan payments, Evans-Pritchard reasoned.

Nevertheless, it was to soon to say that China's FX reserves would stabilise and further loosening of capital controls was unlikely, writes Louis Kujis at Oxford Economics.

"We think that is premature. The turn-around in financial outflows in Q1 was less than half of what is needed to achieve a sustainable stabilization of FX reserves and we do not expect a broader relaxation in the near future," says Kujis.

The main reason for the difference between the two economists' assessments lay in the data used for their analyses.

Capital Economics estimated capital outflows of -$63bn, +$12bn and -$11bn in January, February and March, respectvely, while Oxford calculated outflows of -$72bn, +$5bn and -$41bn.

Oxford Economics also expects the yuan to come under greater pressure again, especially when the US dollar strenthens further.