China Jan data to show slide in FX reserves slowing, inflation picking up

Last Updated: Mon, Feb 06, 2017 15:39 hrs
File photo illustration of South Korean won, Chinese yuan and Japanese yen notes seen on U.S. 100 dollar notes

BEIJING - China is expected to report on Tuesday that foreign exchange reserves fell for the seventh straight month in January but at a much slower pace as authorities tightened controls on capital outflows and the surging U.S. dollar lost some steam.

Other data in coming weeks is expected to show the world's second-largest economy got off to a good start in 2017, with steady growth giving the central bank room to slowly tighten monetary policy to contain the risks from high levels of debt.

China's FX reserves likely fell about $10.5 billion in January, roughly a quarter of the drop seen in December but leaving them hovering around the closely watched $3 trillion level, according to median estimates of economists polled by Reuters.

While the $3 trillion mark is not seen as a firm "line in the sand" for Beijing, concerns are swirling in global financial markets over the speed at which the country is depleting its ammunition to defend the currency and staunch capital outflows.

Some economists forecast that China's reserves actually rose last month due to tighter controls on moving money out of the country as well as valuation effects, with a weaker U.S. dollar boosting the value of the non-dollar currencies China holds.

The yuan currency strengthened against the dollar last month for the first time since September.

But analysts expect downward pressure on the yuan to return, especially if the U.S. continues to raise interest rates, which would likely trigger fresh capital outflows from emerging economies such as China and test its enhanced capital controls.

The government has stepped up oversight of individual forex purchases and outbound investments by companies, saying it wants to close loopholes for speculative outflows.

China announces foreign exchange reserves on Tuesday, followed by trade and inflation data on Feb. 10 and Feb. 14, respectively, while loan and money data is expected anytime from Feb. 10-15.

China will release combined January and February activity data for industrial output, retail sales and fixed asset investment in March, in a bid to smooth out seasonal factors.

Trends in Chinese data can be difficult to pin down early in the year due to distortions created by the long Lunar New Year holiday, when hundreds of millions of people travel and many factories and business shut, often for weeks.

Factory and service sector surveys for January published last week showed growth remained strong, despite some signs of slowing from December. Business expectations remained high.


Inflation data is expected to point to a further pick-up in producer prices, fueled largely by stronger demand and higher prices for building materials and coal.

China's producer price index (PPI) likely rose 6.3 percent in January from a year earlier, a rapid turnaround from when wholesale prices were in decline just four months prior.

Consumer prices likely rose 2.4 percent in January, still relatively benign but the fastest pace since May 2014.

While a strong recovery of commodities prices have pushed up industrial profits, there has been little indication of higher prices being pushed on to the consumer yet.

Still, further evidence of nascent price pressures is likely to suggest the central bank will keep a policy tightening bias.

Trade data for January is also expected to show improvement, with exports in dollar terms from the world's largest exporter seen rising 3.3 percent in January, compared with a 6.1 percent decline the previous month.

China has lagged an export rebound enjoyed by some of its North Asian neighbours in recent months.

Imports likely rose 10.0 percent, accelerating from 3.1 percent growth in December.

China's trade surplus is forecast to have risen to $47.90 billion in January, versus December's $40.82 billion, with growing attention on its large trade surplus with the United States as new U.S. President-election Donald Trump ramps up his protectionist rhetoric.

Banks probably extended 2.3 trillion yuan ($335.2 billion) in new loans in January, the Reuters poll showed, the second highest monthly tally ever and building off last year's record lending.

While Chinese leaders have stressed the need to corral asset bubbles and rely on more sustainable growth, the economy continues to rely heavily on credit to hit official growth targets, with debt levels rising again last year.

The growth rate of outstanding loans likely fell slightly to 13.4 percent year-on-year in January, while M2 money supply growth was likely stable at 11.3 percent.

China's central bank surprised financial markets on Friday by raising short-term interest rates on the first day back from a long holiday.

While the rate increases were modest, they reinforced views that authorities are intent on both containing capital outflows and reining in risks to the financial system created by years of debt-fueled stimulus.