The stash of US dollars used by China to shore up the value of its currency, the yuan, declined at a slower rate in February.
China had $3.202 trillion of foreign exchange reserves last month, according to figures released by the State Administration of Foreign Exchange this morning. It is down by $29bn (£20.5bn) on January. However, the decrease is small than January's $99bn and December's $108bn.
The People's Bank of China uses its foreign exchange reserves to buy yuan, also called renminbi, to raise its value.
"The smallest fall in the value of China’s foreign exchange reserves in four months suggests that capital outflows have eased, allowing the People’s Bank (PBOC) to slow the pace of its intervention," said economist Julian Evans-Pritchard from Capital Economics.
"The upshot is that the combination of tighter capital controls and continued FX intervention along with efforts by the PBOC to better communicate its intention not to allow the renminbi to devalue seems to be bearing some fruit."
Some economists are warning that if reserve outflows continue, Chinese authorities could be tempted to allow a one-off drop in the yuan. China is currently trying to operate what economists call the impossible trinity – a stable exchange rate, free flow of capital, and control over domestic monetary policy.
"As China runs down its foreign reserves, it could reach the point where it is tempted to just let the exchange rate fall. Until now, policymakers have propped up the yuan for two main reasons. Firstly, a major depreciation wouldn’t have sat well with Washington, but this may be less of a concern now the yuan has been admitted into the SDR basket. Secondly, a strong yuan subsidises the paying down of FX debt and the purchase of foreign assets," said economists Freya Beamish and Michelle Lam from Lombard Street Research, a consultancy.
Until China allows its currency to depreciate in tandem with capital outflows, it will continue to be speared by the impossible trinity – the sale of foreign reserves necessitate RRR [reserve requirement ratio] cuts, but RRR cuts merely fuel expectations of yuan depreciation.
For now, China has pledged to shoulder global responsibility by maintaining a relatively stable currency that is responsive to market forces. But the reality is that the quicker its FX reserves melt away, the greater the risk of a one-off depreciation.