SAFE said there was an increase in demand for foreign currency in January as people travelled overseas during the Chinese New Year holiday and companies sought to settle payments before the break.

China's war chest has been much depleted since peaking at $US4 trillion in June 2014. This was largely a result of the PBOC being forced to intervene heavily to support the yuan, in the face of a strengthening US dollar. Even with that intervention, the yuan still fell 6.5 per cent against the dollar in 2016, the most in more than 20 years.

US President's Donald Trump's repeated threats to label China a currency manipulator have placed even more pressure on Beijing to control the pace of the yuan's depreciation. That is despite wide recognition China is now intervening to prop up the currency rather than keep it artificially low.

Increasingly sophisticated investors in China are looking to diversify their portfolios and protect their wealth, amid general concern the yuan will keep depreciating. Chinese companies, too, have sought to diversify their operations overseas.

At the end of last year, China's government responded to the surging outflows by introducing a suite of measures tightening its control over foreign currency transactions. Beijing told banks to balance their monthly inflows and outflows and upped the disclosure requirements for individuals looking to cash out their annual $US50,000 foreign exchange quotas.

Regulators have started to scrutinise more closely multi-billion dollar foreign investments, particularly those that sit outside a company's "core business," as well as big real estate deals by state-owned firms.

For years, this micromanagement of foreign exchange transactions was unnecessary because China's problem was capital inflows rather than outflows. But that trend reversed in the second quarter of 2014.

Capital's China economist Julian Evans-Pritchard said as the $US3 trillion level was viewed as an important threshold, "this decline will likely spark renewed debate over how long the People's Bank (PBOC) can continue intervening to support the [yuan]."


"Our view is that the PBOC can afford to keep selling FX at the current pace for a long time," he said in a research note. "[International Monetary Fund] guidelines suggest that, given the scale of China's export income, broad money, foreign liabilities and its capital controls, the country's FX reserves could fall to as low as $US1.8 trillion and still offer adequate protection against balance of payment strains."

Mr Evans-Pritchard said the latest data could actually be viewed as "reassuring" because the pace of declines had eased.

He estimated capital outflows were about $US45 billion in January, down from $US61 billion in December.

At the same time as the government is attempting to curb outflows, China is also stepping up efforts to attract more capital with the State Council releasing a 20-point plan last month to relax foreign investment rules across its services, manufacturing and mining sectors, although the plan was light on detail.

Even so, the fate of China's reserves may well be in the hands of policymakers in Washington rather than Beijing.

"Outflows may start to pick-up again later this year if, as we expect, the US dollar begins to strengthen again," said Mr Evans-Pritchard.