Central Banks

China forex reserves hit 33-month low on ‘record outflow’

PUBLISHED : Monday, 07 December, 2015, 10:48pm
UPDATED : Monday, 07 December, 2015, 10:48pm

China’s foreign reserves in November fell to the lowest level since February 2013 on what some experts called the mainland’s biggest capital outflow on record.

The reserves held by the central bank fell to US$3.44 trillion at the end of last month, down US$87.2 billion, according to data released on Monday by the People’s Bank of China.

Expectations that the yuan will continue to devalue has led to strong demand for US dollar, forcing the central bank to intervene in the market to prop up the value of the yuan.

The strengthening of the dollar during November caused a revaluation of the assets China holds. About 30 per cent of China’s reserves are denominated in currencies other than the dollar and led to at least part of the drop, analysts said.

READ MORE: Large net capital outflow indicates low confidence in yuan, despite IMF’s SDR move

“That would count for about half of the outflow but not all of it,” said Hong Hao, chief strategist at Bocom International in Hong Kong. “This is still a very significant outflow. It shows strong demand from China’s private sector to buy dollars.”

Factoring in the decrease in value of other currencies, Capital Economics estimates that the central bank sold around US$57 billion in November. If China’s goods and services surplus hit the projected US$55 billion last month, the London-based research house said that would imply net capital outflows of US$113 billion, compared to US$37 billion in October.

“The pick-up in capital outflows appears to have been predominately driven by increased expectations for renminbi depreciation,” Capital Economics China economist Julian Evans-Pritchard said in a note. “A rise in offshore interest rates due to the increased likelihood of a December Fed rate hike will also have added to outflow pressures.”

China’s foreign exchange reserves have fallen by US$405 billion this year.

The International Monetary Fund said late last month that it would add the yuan to its basket of global currencies, called Special Drawing Rights.

Against an expected rate hike in the US in December and gradually higher global interest rates, many experts expect capital outflows from China to continue. The inclusion in the SDR basket next year, which could lead to demand for yuan from central banks in other countries, could temper the devaluation.

READ MORE: China says outflows of money normal and not a sign of panic capital flight

“We do not expect any large-scale devaluation given that RMB has just made it into the SDR basket,” Junheng Li, head of research at JL Warren Capital, said in a note to investors. “Additionally, China will chair the G-20 for 2016, so the leadership in Beijing will not want any embarrassing public controversy about competitive depreciation, etc.”

Over the past week, the yuan has fallen slightly against the dollar from 6.39 to 6.40. Nomura expects the yuan to fall to between 6.75-6.80 by the end of next year.