China FX reserves rise unexpectedly in February, capital outflows dry up

China's foreign exchange reserves increased in February for the first time in eight months, but economists were wary of the possibility that Beijing might have stepped in to weaken its currency, potentially irking the White House.

China´s foreign exchange reserves rose by $6.92bn in February to hit $3.005trn, according to the People's Bank of China.

That was ahead of forecasts for a decline to $2.969trn.

Tuesday's data suggested the PBoC bought foreign exchange reserves in February for the first time since October 2015 and that capital outflows stalled, Julian Evans-Pritchard, china economist at Capital Economics said.

Nonetheless, "the picture is murkier than usual around Chinese New Year, when port and bank closures disrupt both trade and financial flows," Evans-Pritchard cautioned.

To infer that the PBoC had bought foreign reserves during the month one needed to assume that exchange rate and bond price fluctuations had in fact lowered the value of the Chinese central bank's hoard.

That was what the research outfit's models indicated but it might also be that the PBoC had shifted assets from elsewhere on its balance sheet, for example.

The FX data also suggested capital flows might even have completely dried up; indeed the country's trade surplus likely fell in February, Capital Economics said.

Evans-Pritchard believed Chinese authorities would ultimately prove able to avoid a sharp devaluation but that it was too soon to expect to see a turning point.

"After all, in the same way that port closures cause disruption to trade flows around Chinese New Year, so closures of banks and other financial institutions disrupt capital flows. We’ll reserve judgement until the Chinese New Year volatility is out of the way."