China’s FX reserves hit seven-month high as capital flows back in

Reserves rise for fifth month in a row in March, as US-China trade thaw eases foreign investors’ concerns

Investors' concerns are eased by prospect of an end to US-China trade spat

China’s foreign exchange reserves grew for the fifth month in a row in March, hitting a seven-month high of $3.1 trillion, a sign that foreign capital is flowing back into the country on rising hopes of a US-China trade deal.

China’s FX reserves rose by nearly $9 billion, the country’s State Administration of Foreign Exchange (Safe) said on April 7. That topped expectations for a $5 billion gain, according to a Reuters poll of economists.

The increase was mainly due to a strengthening in the US dollar against a basket of currencies, Safe said after the data release.

“The US dollar index strengthened slightly in March due to the China-US trade talks, the revised policy outlooks of central banks in Europe and America, as well as uncertainty over Brexit,” it said.

The gain suggest a net inflow of capital for China, as foreign investors take heart from reports that the US and China are closing in on an end to their tit-for-tat trade tariff war. That is offsetting concerns about the country’s slowing economic growth, analysts said.

“The fact that China’s FX reserve rose for five months in a row suggests foreign capital is flowing back, as China becomes more attractive to foreign investors amid rising hopes of a trade deal and the struggling global economy,” Li Chao, an analyst with Nanjing-based Huatai Securities, wrote in a report on April 8.

Capital inflows to China are likely to accelerate in 2019, as the authorities are expected to increasingly open up to foreign capital and portfolio flows, according to a report by Morgan Stanley in February.

“We expect to see $80 billion–100 billion of inflows into the government bond market in 2019, compared to $35 billion on average over 2015–18, and potentially as much as $120 billion on average over 2020–2030,” the report said.

For equities, Morgan Stanley expects 2019 to be a record year of inflows for the A-share market, with as much as $70 billion–125 billion entering the market.

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