China’s forex erosion points to high outflows amid capital control loopholes
Capital controls and tight onshore liquidity are priorities for policy makers, analysts say
China’s foreign exchange reserves unexpectedly fell below US$3 trillion in January for the first time in six years.
The breach of the psychologically important level raises the question of whether they are still sufficiently large to guarantee Beijing’s ability to continue supporting the yuan. The consensus among observers seems to be yes.
But the rapid fall in reserves serves as a warning sign that individuals and companies are still managing to get around regulations designed to prevent capital flight, analysts caution.
The value of China’s foreign exchange (forex) reserves slipped to US$2.998 trillion at the end of January, down US$12 billion from a month earlier, official data indicated. It was the seventh consecutive monthly drop and the first time the reserves have breached the US$3 trillion mark since February 2011.
Our view is that the PBOC can afford to keep selling FX at the current pace for a long time
Excluding currency valuation effects, forex reserves may have fallen by US$37 billion in January, after declining US$35 billion in December, according to a Goldman Sachs’ estimate.