Experts say yuan depreciation may see reversal this year

China's foreign exchange reserves climbed above the $3 trillion mark in February, the first rise in eight months, thanks to an improving export situation and a slowing of capital outflows.

Analysts say the trend of yuan depreciation may be reversed this year if China's economic fundamentals continue to improve.

The country's foreign exchange reserves rose by $6.92 billion in February to $3.005 trillion, the first increase since June 2016, data from the People's Bank of China, the central bank, showed on March 7.

In January, the reserves fell to $2.998 trillion, sparking heated discussions over whether they would continue to fall and become inadequate for guarding the country's financial stability. The February rebound may ease such concerns, analysts say.

The rise in the reserves was partly due to the recovery in the domestic economic and higher exports in February, says Ren Zeping, chief economist at Founder Securities Co.

China's export growth was 15.9 percent in January, with similar growth expected in February. In 2016, the country's exports fell by 2 percent year-on-year.

The yuan, meanwhile, stabilized in February. This, together with stricter implementation of foreign exchange purchasing rules, dampened capital outflows and contributed to the rise in foreign exchange reserves, Guotai Junan Securities Co says in a research note.

"The market mood was reversed in February and demand for the yuan rose, leading to the central bank's purchasing dollars," said Deng Haiqing, chief economist at JZ Securities Co.

Meanwhile, bond yields in the United States, the European Union and Japan all dropped, leading to an increase in bond prices and a revaluation of reserve assets, he says.

The State Administration of Foreign Exchange said that China's foreign exchange reserves were likely to gradually stabilize as capital outflow pressures eased - a result of the country's improving economic fundamentals.

In the short term, the yuan has stabilized, but in the medium term it still faces potential downward pressure as the dollar may strengthen thanks to improvement of the US economy and possible interest rate hikes by the US Federal Reserve, Ren says.

The Fed may raise interest rates as early as next week. He says if that happened, it may trigger capital outflows to the US from emerging markets, including China.

Yi Gang, deputy governor of the central bank, said during the ongoing annual plenary session of the National People's Congress that China would stick to its managed floating exchange rate framework to keep the yuan stable.

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