PBoC data showed on Tuesday that China's foreign exchange reserves in May fell to $3.19 trillion, the lowest since December 2011. Economists polled by Reuters had predicted a fall to $3.20 trillion from $3.22 trillion at the end of April. Prior month data show that the reserves rose by $7.1 billion in April and $10.3 billion in March.

It was the first monthly fall since February and gives an impression that the capital outflows from China are easing. However, the decline in FX reserves in May was largely due to unfavourable valuation effects as the USD strengthened in the month.

Commerzbank estimates the valuation effect should have decreased the FX reserves by USD36.1bn in May. China has started to release the FX reserve data in SDR terms since January 2016 and in SDR terms, China’s FX reserves rose by SDR3.5bn in May. In other words, China’s FX reserves have stabilized somewhat.

USD-CNY fixing rates in the past few weeks reveal that PBoC intends to guide its currency to the weak side as the CNY has depreciated by more than 4.5% YTD against a basket of currencies. Stabilizing FX reserves which show easing capital outflows  release the deprecation pressure on CNY exchange rate for the time being.

Of course, the capital control measures by the PBoC have taken some effects, and massive intervention in the past few quarters significantly reduced the short CNY/CNH positions in the market. Furthermore, recent USD softness after the poor nonfarm payroll data should give the Chinese authorities a breathing space in the foreseeable future.

"A “managed deprecation” in CNY – still remains valid. We, therefore, maintain our forecast that USD-CNY will reach 6.65 by the end of this year," notes Commerzbank in a report.