China Pulls Out All the Stops to Halt Capital Outflows

The country has won, for now, but the long-term trend says otherwise

by Craig Stephen
Market Watch

The first increase in foreign reserves in five months suggests China has won the battle with speculators who are shorting the yuan. Yet, winning the war and ending fears that a currency devaluation is inevitable will remain without signs the economy is on a sustainable path.

There are a number of reasons to believe the reprieve is only temporary. For one, there appears to be an element of good fortune, or the stars being aligned, to deliver the $10.3 billion boost to reserves to $3.21 trillion in March.

Healthier reserves are partly due to currency revaluation. Société Générale estimates some $40 billion is due to the weakening of the U.S. dollar after the Federal Reserve’s recent more dovish tone. This would have also been even more unlikely had attempts by the ECB and the Bank of Japan to weaken their respective currencies in recent months with negative interest rates not backfired.

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