(Yicai Global) May 8 -- China's foreign exchange reserves have rebounded for several months in a row, and the size of banks' foreign exchange settlement deficits has narrowed, reflecting the slowdown in cross-border capital outflows and a more even balance between foreign exchange supply and demand. The "worst era" for capital outflow has passed, many experts said.
The balance of forex reserves increased for the third month in a row in April and at the end of the month, they stood at USD 3.03 trillion, a month-on-month increase of USD20.4 billion or 0.7 percent, data that China's central bank released May 7 shows.
The rise in forex reserves in April may be related to bond asset valuations, bond interest income, and other factors. By a simple estimate, the rise in US debt valuation in April contributed to about USD18.4 billion, Xie Yaxuan, chief macro analyst from China Merchants Securities told Yicai Global.
Compared to last year, several factors that led to the devaluation of the yuan have been reduced to varying degrees, Li Minhong, vice president of Deutsche Bank and director of North Asia Capital Market, said recently. The dollar is not so much stronger and China's economy recovered, reducing capital outflow pressure, Li said.
The yuan's internationalization is still accelerating and overseas investors are again eyeing the yuan as an investment currency. The opening up of China's capital market and reform of the exchange rate market greatly affect cross-border capital flows.
Although the likelihood of US Federal Reserve interest rate hike in June soared, the US dollar index remained weak, and the yuan exchange rate is expected to stabilize. This means that the pressure of capital outflows in emerging market continues to ease, Xie said.
Industry experts believe that the worst era for cross-border outflow has ended.
"For investors, the depreciation of the yuan against the US dollar, and the capital outflow is the old story of last year," Li said. "The new story of 2017 is that once the yuan begins to appreciate, and it enters a new weak US dollar cycle, whether export enterprises have done a good job of foreign exchange risk management."
From comprehensive domestic conditions, the stage for a substantial net outflow of cross-border funds should be said to have ended, said Zhao Qingming, chief economist at China Financial Futures Exchange Research Institute.
The dollar's strong momentum is over, said Zhao. With the current pricing method of the yuan exchange rate, a sharp weakening of the yuan against the US dollar is no longer possible.
The dollar index has weakened after hitting a record-high of 104 at the beginning of the year, he said. Now the dollar index is around 99, a depreciation of about 5 percent compared with the high. The yuan against the dollar is slightly stronger. Its rate appreciated to 6.89 from 6.96, an increase of about 1 percent. With the current pricing method, the yuan against the dollar will not gain considerably unless the dollar index falls rapidly.
Once the yuan's rate against the dollar stabilizes or appreciates, capital outflow will basically be stable, Zhao said.
The three Federal Reserve rate hikes gradually weakened China's capital outflow, Wang Chunying, director of the balance of payments department of the State Administration of Foreign Exchange, said earlier at a press conference on first-quarter forex receipt and payments.
Even in the absence of substantial yuan depreciation against the dollar, cross-border funds will not quickly return to the state of a substantial net inflow that was once prevalent, Zhao said. Forex reserves will probably not grow substantially, and future capital inflows and outflows will remain balanced.
Chinese companies' and individuals' global asset allocation is far from over, Zhao said. A sudden change in capital flows is only possible if the yuan appreciates quickly. Therefore, the inflow and outflow of capital will be roughly balanced, and foreign exchange reserves will not have the kind of substantial growth they had in the past.