China’s Forex Reserves Fall by Record $107.9 Billion

Jan 08, 2016

Foreign-exchange reserves drop to a nearly three-year low, contributing to the largest yearly decline ever

 

China’s hoard of foreign-exchange reserves continued to shrink in December, recording the biggest monthly drop ever and falling overall to its lowest level in nearly three years as worries intensify over the country’s economic slowdown.

With the $107.9 billion drop in December, Beijing’s foreign-exchange reserves have fallen every month but one since May. The data suggest the central bank is having to spend huge amounts of dollars to support an increasingly beleaguered yuan amid decelerating economic growth and the onset of higher U.S. interest rates.

“It certainly confirms the end of an era,” said Oliver Barron, head of research at investment bank North Square Blue Oak. “What we’ve been seeing is China now becoming an exporter of capital.”

The tally of December’s outflows came as the Chinese currency has staged a marked decline this year. The central bank on Thursday set the daily yuan reference exchange rate against the U.S. dollar 0.5% weaker.

Outflows are a relatively new puzzle for Beijing. Its foreign-exchange reserves piled up for more than a decade as the central bank bought dollars flowing into its money supply from inbound investment and the country’s massive export volumes. With the world’s No. 2 economy sputtering, the direction of its capital movement has reversed, as ordinary Chinese and businesses rush to change yuan into dollars.

December’s decline brought overall reserves to $3.33 trillion, the People’s Bank of China said Thursday. For the full year, reserves fell $512.7 billion, the largest yearly decline on record. In addition to the PBOC’s spending to support the yuan, some of December’s decrease may have stemmed from depreciating nondollar assets among the central bank’s holdings as the U.S. raised rates last month, analysts said. Higher U.S. interest rates make dollar-denominated assets more attractive to investors.

China guides its official exchange rate with the dollar in the mainland market, but allows a freer float of the yuan in the so-called offshore market in Hong Kong. Offshore, the yuan has been battered even lower than in the mainland market. That puts pressure on the currency in onshore trading and raises the likelihood, analysts said, of accelerating outflows in the coming months. A weaker currency prompts investors to look beyond the country to put their cash, complicating the government’s efforts to revive domestic spending.

The declining hoard of reserves is a bellwether for broader capital outflows, as companies scramble to pay down their foreign-currency loans to protect their balance sheets from yuan depreciation.

China has tightened capital controls to try to slow the departure of money from its shores, but the market continues to find new ways to help investors invest overseas.

A weaker currency in theory would boost exports, but concerns over deep structural problems in China’s economy dog its broader outlook.

 

Source: Wall Street Journal