China FX reserves dip in May as US dollar strengthens

China´s foreign exchange reserves dipped in May, mainly due to strength in the US dollar, which by default entails a lower value for its holdings of the other main international reserve currencies.

The value of the country´s FX reserves fell by $28bn from April´s level to reach $3.19bn by the end of May, versus analysts´ forecasts for a reading of $3.2bn.

Although it marked the first decline in reserves since February, US dollar strength accounted for $25bn of the fall, Julian Evans-Pritchard, China economist at Capital Economics said in a research note sent to clients.

Together with an estimated $30bn current account surplus in May, Tuesday´s data implied net capital outflows of $32bn, up slightly from the $26bn seen in April, Evans Pritchard said.

"The big picture though is that depreciation expectations remain much more manageable than in late-2015 and early-2016, when China was witnessing outflows of over $120bn per month."

Nonetheless, the economist was of the belief that the US central bank would surprise markets by tightening policy more quickly than they anticipated, such that there was a good chance for capital outflows to pick-up again later in 2016.

"While we don’t expect these to be large enough to overwhelm the PBOC, they may nonetheless put further strain on China’ exchange rate regime."