May 7, 2018 / 8:35 AM / 3 months ago

UPDATE 2-China's April FX reserves fall to 5-month low as dollar bounces

* China’s FX reserves fall by $17.97 bln in April

* Economists had expected reserves to drop by about $10 bln

* Stronger dollar seen depressing value of reserves (Adds FX regulator, analyst comments)

By Kevin Yao and Fang Cheng

BEIJING, May 7 (Reuters) - China’s foreign exchange reserves in April fell more than expected, to a five-month low, as the U.S. dollar rebounded and on growing signs that Chinese regulators are less worried about capital flight.

Reserves fell $17.97 billion in April to $3.125 trillion - the lowest since November 2017, compared with a rise of $8.34 billion in March, central bank data showed on Monday.

Economists polled by Reuters had forecast reserves would drop around $10 billion in April to $3.133 trillion, with a stronger U.S. dollar versus other currencies expected to depress the value of China’s dollar-denominated reserves.

The fall in non-dollar currencies against the U.S. dollar and correction in asset prices led to the small reserves drop in April, the State Administration of Foreign Exchange (SAFE), China’s foreign exchange regulator, said.

“The drop reflected almost exclusively the valuation effect of a firmer USD in April,” said Andy Ji, currency strategist at Commonwealth Bank of Australia in Singapore.

“In other words, there are no signs of capital outflows at the current juncture.”

But Julian Evans-Pritchard at Capital Economics said he believed China’s current account returned to a healthy surplus in April from a seasonal deficit in March, implying a sharp reversal in capital flows from net inflows to net outflows.

“This is nothing to worry about, however. Such volatility in net cross-border flows is not uncommon at this time of year and net outflows look to have remained well within regulators’ comfort zone,” he said in a note.

The dollar index, measuring it against other major currencies, rose 2 percent last month.

Capital flight was seen as a major risk for China at the start of 2017, but a combination of tighter capital controls and a faltering dollar helped the yuan stage a strong turnaround, bolstering confidence in the Chinese economy.

Last year, China’s reserves rose for the first time since 2014 and its cross-border capital flows went from net outflows to basically stable.

Trade disputes between China and the United States could hurt exporters on both sides and weigh on their economic growth, while adding to volatility in global financial markets.

But China’s foreign exchange regulator said in April that any potential impact on its cross-border capital flows stemming from Sino-U.S. trade frictions can be controlled.

COURTING CAPITAL INFLOWS

The yuan lost around 1 percent against the resurgent greenback in April, but it is still up about 2.5 percent so far this year.

Indeed, in recent weeks, Chinese authorities have announced a series of moves which suggest they are less worried about capital outflows, including allowing domestic investors to put more money into global financial markets.

At the same time, China has moved to give foreign investors more access to its equity, bond and commodity futures markets, which will help support the yuan and offer greater balance to cross-border flows.

The value of China’s gold reserves fell to $77.788 billion at the end of April, from $78.419 billion at the end of March.

Editing by Jacqueline Wong and Richard Borsuk

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