China’s foreign exchange reserves likely to record another massive fall in January, analysts predict
China’s foreign exchange reserves, already at a three-year low, are poised to post a second consecutive record monthly drop as policy makers intervene to support the yuan, according to analysts.
The central bank will say on Sunday that the currency hoard fell by US$118 billion to US$3.2 trillion in January, according to economists’ estimates in a Bloomberg survey. That would exceed a record US$108 billion decline in December, which brought last year’s total fall to more than half a trillion dollars and capped the first annual decrease in the reserves since 1992.
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Policy makers are burning through billions of dollars to hold up a weakening currency amid flagging growth and US$1 trillion in capital outflows last year. The yuan sank to a five- year low last month as the People’s Bank of China set the reference rate at an unexpectedly weak level, a signal that it is more tolerant of depreciation as growth slows.
“China is facing a significant capital outflow problem,” said Krishna Memani, who helps oversee US$217 billion as chief investment officer at Oppenheimer Funds in New York. “It’s an astounding reduction in their capital account position. This is an issue they’ve been aware of and they have to find a way of managing it. The economy itself cannot turn this around.”
The drawdown has accelerated since the central bank’s surprise devaluation of the currency in August. Reserves tumbled US$94 billion that month, a record at the time. Another cut to the yuan’s reference rate last month spurred a stock sell-off that has helped push the Shanghai Composite Index down 21 per cent this year and into a bear market.
Beijing’s foreign exchange reserves surged almost 200-fold from US$21.2 billion in 1993 to a peak of almost US$4 trillion in 2014. Even after falling 17 per cent since then, the reserves remain the world’s largest and are almost triple the level held by Japan, which ranks second.