China FX reserves rebound above $3 trillion in February, first rise in eight months

China's foreign exchange reserves unexpectedly rose for the first time in eight months in February, rebounding above $3 trillion as a regulatory crackdown and a steadying yuan helped staunch capital outflows.

The rebound in reserves could ease fears in global markets that China will engineer another sharp one-off devaluation of the yuan, which would run the risk of inflaming trade tensions with the new U.S. administration under President Donald Trump.

Reserves rose $6.92 billion during February to total $3.005 trillion, their first increase since June 2016, central bank data showed. That compared with a drop of $12.3 billion in January, when reserves fell to $2.998 trillion.

Economists polled by Reuters had expected forex reserves to drop by $25 billion in February.

The State Administration of Foreign Exchange, the foreign exchange regulator, said in a statement that China's foreign exchange reserves are likely to stabilise gradually as pressures on capital outflows ease.

China has tightened rules on moving capital outside the country in recent months as it seeks to support the yuan currency and stem a slide in reserves.

It burned through nearly $320 billion of reserves last year but the yuan still fell 6.5 percent against the dollar, its biggest annual drop since 1994.

The yuan has steadied in recent weeks as the dollar's rally lost steam. The Chinese currency gained 0.2 percent in February, and is up 0.8 percent so far in 2017.

However, expectations of U.S. interest rate hikes beginning as early as next week have rekindled fears that the yuan could come under renewed pressure.

China's gold reserves rose to $74.376 billion at the end of February, from $71.292 billion at end-January, data published on the People’s Bank of China website showed.

Trump had said during the election campaign that he would declare China a currency manipulator on his first day in office, but his advisers now say they will wait for a final verdict from a U.S. Treasury currency report due in mid-April.

Some analysts noted a subtle change in the language used to describe the yuan in Premier Li Keqiang's annual work report on Sunday had sparked some speculation that policymakers were now less willing to defend the Chinese currency.

China will allow bigger fluctuations in the yuan this year, a policy adviser told Reuters on Monday, speaking on condition of anonymity.

"I cannot say the (yuan) depreciation will be bigger than last year, but I can say its fluctuations will be bigger this year than last year," the adviser said,

PBOC Deputy Governor Yi Gang, meanwhile, told reporters that Beijing will stick to its managed floating exchange rate framework to keep the yuan currency basically stable.

TIGHTENING ITS GRIP

China's banks on Jan. 1 began requiring individuals using their $50,000 annual foreign currency quota to specify how and when they will use funds, with additional documentation sometimes required.

Authorities are also closely examining outbound investments.

The sports ministry, for example, has reminded Chinese investors to follow rules on moving capital overseas, after a huge splurge by Chinese buyers on foreign soccer clubs.

In addition to stepping up controls on money leaving the country, authorities have boosted efforts to bolster inflows.

The foreign exchange regulator said at the end of last mlonth that it would allow foreign investors in the interbank bond market to trade forwards, forex swaps and options.

But restrictions on taking money out of the country may discourage foreign investors, despite recent assurances by the central bank that foreign companies were able to repatriate profits normally.

“While further tightening of capital controls since December is meant to forestall capital outflows, it may also wreak havoc on foreign direct investment and investor inflows,” analysts at Bank of Tokyo-Mitsubishi wrote in a note earlier this week.