China FX reserves rise to highest level in over a year in December

China's foreign exchange reserves hit their highest level since September 2016 last month as interbank liquidity tightened, analysts said.

FX reserves rose for an eleventh consecutive month, by $20.2bn, to reach $3.14trn (consensus: $3.1268trn), the People's Bank of China said on Sunday.

They were also higher for 2017 as a whole, having jumped by $129.5bn, for their first increase since 2014.

On a related note, the country's foreign exchange regulator said on its website that it would keep China's FX reserves and balance of payments "balanced and stable" in 2018.

According to Freya Beamish at Pantheon Macroeconomics, Sunday's data implied that net capital outflows slowed from a $46.9bn pace for November to $27.5bn last month.

Indeed, as FX reserves climbed, the PBoC lent against the inflows, she said, with gains in the country's currency in December likely driven by a spike in interbank interest rates - which Beijing countered by allowing lenders to draw down their own reserves by 2% around the Lunar New Year holiday, between 15 to 21 February.

Currency valuation effects on December's tally of FX reserves were "minimal", Beamish added.

On a different note, Beamish also noted how the yuan had reached a level at which the central bank was thought to have intervened in FX markets last September in order to stem the appreciation in the currency.

If it intervened again, then FX reserves might climb further in January, resulting in additional liquidity being added to domestic markets, the analyst said.

Nonetheless, the yuan was seen depreciating over the course of 2018 as yields rose overseas.

"We think the RMB can depreciate against the dollar from around 6.5 at the time of writing, to around 6.8 without spooking markets, as this would merely undo the appreciation in the second half of last year. But the PBoC still would use FX reserves to manage the currency down."