China’s forex reserves may beat expectations, analyst says

China’s foreign-exchange reserves data for January, due on Tuesday, may surprise on the upside after a long downtrend, an analyst told CNBC.

Hao Zhou, senior emerging markets economist for Asia at Commerzbank, told CNBC’s “Squawk Box” on Monday that the market should prepare for an upside surprise in the data, particularly as mainland authorities were likely to defend the psychological $3 trillion level.

China reported that its foreign exchange reserves fell for a sixth straight month in December, declining by $41 billion for the month, to $3.011 trillion, the lowest since early 2011. At their pinnacle, reserves reached around $3.99 trillion in mid-2014.

Analysts have said previously that while the markets may be fixated on $3 trillion, there’s little fundamental basis for the fixation, with an adequate level likely around $2.25 trillion.

A Reuters poll of economists has forecast the level to come in at $3 trillion for January.

Zhao pointed to two reasons that the data may beat that forecast.

“First of all, we see a favourable valuation effect for last month because the dollar retreated a lot against the euro and Japanese yen,” he said, noting that means China’s euro- and yen-denominated assets should look plumper in dollar terms.

Secondly, Zhou noted that China’s central bank, the People’s Bank of China (PBOC) has reduced the size of its intervention in the onshore and offshore markets over the past couple months. The PBOC has been supporting its currency against the dollar as the dollar index, which measures the greenback against a basket of currencies, surged to its highest levels in 14 years.

However, Zhou noted that Chinese authorities still likely want the yuan to weaken somewhat, which meant that outflows were set to continue.

“The renminbi (yuan) depreciation also can be used as an instrument for China to deflate the bubble,” he said, noting that a weaker mainland currency will reduce the attractiveness of yuan-denominated assets, such as property.

“If you are a rational buyer, you will go to offshore to buy assets rather than onshore. That’s the reason for continuous capital outflows from China,” he said.

Source: CNBC