China's foreign exchange reserves were little changed in February

The Chinese government's stash of foreign reserves was little changed last month, leading one think-tank to the conclusion that Beijing's policies of tighter capital controls and communicating better that it was not its intention to devalue the currency were bearing some fruit.

China's official foreign exchange reserves decreased by $28.6bn month-on-month to reach $3.2trn in February, according to data from the People's Bank of China released on Monday morning, after the close of stockmarket trading in Shanghai.

That level was slightly higher than the $3.19trn which markets had been expecting and marked the smallest drop in four months, Julian Evans-Pritchard, China economist at Capital Economics, said in a research note sent to clients.

"The smallest fall in the value of China’s foreign exchange reserves in four months suggests that capital outflows have eased, allowing the People’s Bank (PBOC) to slow the pace of its intervention," he said.

Given his forecast for China's current account to have been in surplus to the tune of approximately $30bn last month, which meant foreign exchange reserves would flow into the country at that pace, and that currency fluctuations would have added about $5bn of value to the reserves not held in US dollar, Evans-Pritchard estimated China's net capital outflows for the month at about $65bn.

That would be almost half the $128bn observed in January.

"The upshot is that the combination of tighter capital controls and continued FX intervention along with efforts by the PBOC to better communicate its intention not to allow the renminbi to devalue seems to be bearing some fruit."

China's currency, the yuan, had been flat in trade-weighted terms since the Chinese New Year at the beginning of February and had gained 0.9% versus the greenback.

Evans-Pritchard also took note of the results of the BIS study released over the weekend which revealed that Chinese companies paying down their US dollar debts, in anticipation of a weaker yuan and higher servicing costs, together with a decrease in offshore yuan deposits, were the main factors behind capital outflows and not investors ditching their Chinese assets.

"That is a far less destabilising scenario than if Chinese residents were shifting assets offshore," he concluded.

Likewise, he believed the PBoC deputy governor's claims regarding the liquidity of its foreign reserve assets was backed up by the evidence, if one looked at the central bank's balance sheet.