Developing | ‘It’s a kind of vicious cycle’: China’s foreign reserves fall by record US$108b in December

China’s foreign exchange reserves fell more than US$100 billion in December as the central bank struggled to fight massive capital outflows and fend off attacks on the yuan.

Markets were taken by surprise as data released by the People’s Bank of China on Thursday revealed the reserves had fallen a record US$107.9 billion – the first time a monthly fall has surpassed the US$100 billion mark and the tenth monthly fall of 2015.

The new data meant that for 2015 as a whole there had been a fall of US$512.7 billion to US$3.33 trillion – lower than the US$3.4 trillion expected by economists and down from US$3.84 trillion at the end of 2014.

The meltdown of China’s foreign exchange reserves picked up in August after the PBOC ended a soft peg to the US dollar and targeted a basket of currencies on August 11. The move resulted in sharp depreciation of the yuan against the greenback and triggered frequent intervention by the central bank to defend the yuan. August’s fall of US$93.9 billion was second only to the drop in December.

“It is a kind of vicious cycle – the weaker the yuan, the more capital flight,” said Shen Jianguang, chief economist with Mizuho Securities Asia in Hong Kong. “The big fall in December foreign exchange reserves is another blow to market confidence in the yuan.”

He said the PBOC was sending unclear messages to the market, causing additional confusion and uncertainty among investors.