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Economy

China's currency reserves up as yuan stabilizes

Lower expectations of a U.S. interest rate hike have made the People's Bank of China's job easier.

BEIJING -- China's foreign exchange reserves increased on the month for the first time since October as receding speculation about a U.S. interest rate hike alleviated downward pressure on the yuan, freeing the central bank to scale back intervention.

     The reserves grew $10.2 billion to reach $3.21 trillion at the end of March, data released Thursday by the People's Bank of China shows.

     China's foreign-currency reserves -- the world's largest -- had shrunk $320 billion over the four months through February. As a sluggish economy combined with expectations of a U.S. rate hike put heavier pressure on the yuan, the central bank repeatedly drew on its stock of dollars to prop up the currency.

     The country's reserves have fallen about 20% from a nearly $4 trillion peak reached in June 2014. Market players had worried that continued intervention could push the figure below the recommended level of roughly $2.8 trillion based on International Monetary Fund guidelines.

     The March upswing will likely enable China to avoid for now a vicious cycle of mounting market concern about plunging reserves driving further yuan depreciation. But the country's economy is still slowing, and the reduced downward pressure on the currency owes much to U.S. monetary policy.

     The Federal Reserve decided against raising rates in a March meeting and indicated that it would slow the planned pace of hikes this year. As a result, the dollar weakened by more than 1% against the yuan that month, giving the Chinese central bank less reason to intervene. Back in March, Gov. Zhou Xiaochuan told reporters that exchange rates have been returning to normal, suggesting that the bank intends to step in less frequently.

     The dollar also softened against not only the yuan, but also the euro and the yen, lifting the value in dollar terms of assets denominated in those currencies.

     Also on Thursday, the central bank released for the first time the value of its reserves denominated in Special Drawing Rights. The reserve asset reflects the movements of such currencies as the euro and the yen as well as the dollar. China's reserves fell in SDR terms in March, indicating that they remain in a downtrend after excluding the boost from a weaker greenback.

     Chinese authorities are not assuming that the decline has completely halted. The State Administration of Foreign Exchange warned in a March report of continuing fluctuations in financial markets as growth slows amid the transition from an investment-driven economy to one driven by consumption. Downward pressure on the yuan fueled by capital outflows will likely remain a source of instability in global markets.

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