China June forex reserves rise unexpectedly but outflow fears persist

by Jonathan Adams

China reported a surprise increase in June foreign exchange reserves on Thursday, but analysts said they could fall again in coming months if the weakening Yuan triggers more capital outflows.

Even as the Yuan slides to 5-1/2 year lows against the dollar and the economy struggles, official data suggest speculative capital flight is under control for now, thanks to the country’s capital controls.

But analysts and financial markets widely expect the Yuan to weaken further in coming months, risking a surge in outflows like those seen in 2015 and early this year.

China’s foreign exchange reserves rose $13.4 billion (£10.36 billion) in June to $3.21 trillion (£2.48 trillion), recovering from a five-year low in May, central bank data showed on Thursday. June’s increase was the biggest in 14 months.

Economists polled by Reuters had predicted reserves would fall $20 billion (£15.46 billion) to $3.17 trillion (£2.45 trillion), reckoning on sharp drops in the value of China’s sterling and euro holdings following Britain’s shock vote last month to leave the European Union.

But the turmoil which followed also boosted safe-haven currencies such as the dollar and the yen.

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