China forex reserves see first rise in five months

China's foreign exchange reserves unexpectedly rose in March, according to data released by the People’s Bank of China.

The reserves were up by $10.26bn from the previous month to $3.213trn at the end of March, suggesting the central bank’s efforts to steady the yuan may be working.

This was the first increase in foreign exchange reserves in five months and came against expectations of a $6bn decline.

However, the data was flattered by weakness over the month in the value of the US dollar, which in turn boosted the value of the People's Bank of China's reserves of other currencies.

Julian Evans-Pritchard, China economist at Capital Economics, pegged the amount of that revaluation effect at approximately $45bn, meaning that the PBoC sold FX reserves to the tune of $35bn, similar to February's tally.

Added on top of a monthly capital account surplus of around $25bn, implied net capital outflows in fact rose slightly between February and March from $43bn to about $60bn, he explained.

Concerns about the possibility of a large scale depreciation now fading - Julian Evans-Pritchard

Debt deleveraging cannot keep running at same pace

"Nonetheless, it is noteworthy that outflows did not jump back more significantly last month as business resumed after the holiday – outflows were $124bn in January. This suggests that the appreciation of the renminbi against the dollar over the past couple of months has shifted market expectations for the currency, with concerns about the possibility of a large scale depreciation now fading and outflow pressures easing as a result," Evans-Pritchard added.

Although downward pressures on the renminbi might resurface at some point over the coming quarters - on the back of strength in the Greenback - the think tank did not expect them to "get out of hand".

That was because it expected the process of deleveraging external debt to slow down - due to the limited stock of such debt - and only a deeper economic crisis might spark a rush by for the exit by Chinese firms and households, in the form capital outflows.

Hence, the PBoC had plenty of dry powder available to keep the renminbi "broadly stable" in trade-weighted terms in 2016, Evans-Pritchard said.