China Nov forex re­serves fall more than ex­pected The low­est in nearly 6 years

Kuwait Times - - BUSINESS -

BEI­JING: China’s for­eign ex­change re­serves fell far more than ex­pected in Novem­ber to the low­est level in nearly six years, as au­thor­i­ties strug­gled to stem cap­i­tal out­flows and shore up the slid­ing yuan in the face of a re­lent­lessly ris­ing dol­lar. Re­serves fell by $69.06 bil­lion last month, the fifth straight month of de­clines, to $3.052 tril­lion, lev­els not seen since March 2011, cen­tral bank data showed yes­ter­day. Some traders be­lieve the $3 tril­lion mark is a key psy­cho­log­i­cal level for the Peo­ple’s Bank of China, but it risks rapidly churn­ing through its still mas­sive stock­pile if the US dol­lar con­tin­ues to rise against other cur­ren­cies.

Last month’s drop was the largest since Jan­uary, when a sharp fall in the yuan and wor­ries about China’s slow­ing econ­omy raised fears that Bei­jing would de­value its cur­rency, roil­ing global fi­nan­cial mar­kets. Econ­o­mists polled by Reuters had ex­pected re­serves to drop $30 bil­lion to $3.091 tril­lion in Novem­ber, af­ter a de­cline of $45.7 bil­lion in Oc­to­ber. The cen­tral bank is widely be­lieved to have sold US dol­lars to sup­port the yuan cur­rency as it sunk to more than 81/2 year lows last month.

China’s for­eign ex­change reg­u­la­tor said the de­cline in re­serves was partly due to the dol­lar’s 3 per­cent rally ver­sus ma­jor cur­ren­cies in Novem­ber. But the yuan’s more than 5 per­cent slide so far this year has sparked a flurry of bets that the cur­rency will weaken fur­ther, leav­ing traders won­der­ing how long China can main­tain its yuan de­fense and with­stand a pro­longed drain on re­serves if the US dol­lar con­tin­ues to rally. The yuan fell 1.6 per­cent in Novem­ber alone, its worst month since Au­gust 2015 when Bei­jing shocked global mar­kets by de­valu­ing the cur­rency by al­most 2 per­cent overnight.

Adding to pres­sure on the cur­rency, U.S. Pres­i­dent-elect Don­ald Trump has vowed to la­bel China a cur­rency ma­nip­u­la­tor on his first day in of­fice on Jan. 20 and has threat­ened to im­pose huge tar­iffs on im­ports of Chi­nese goods. Though the com­po­si­tion of China’s re­serves is a state se­cret, an­a­lysts say the fall­ing value of other cur­ren­cies it holds against the ris­ing US dol­lar likely ac­counted for some of the fall in re­serves. But China also has an­nounced a string of mea­sures in re­cent weeks to tighten con­trols on money mov­ing out of the coun­try, adding to mar­ket spec­u­la­tion that po­ten­tially desta­bi­liz­ing cap­i­tal out­flows are on the rise.

“The cap­i­tal con­trol tight­en­ing that Chi­nese au­thor­i­ties an­nounced at end-Novem­ber is a very good in­di­ca­tor that cap­i­tal out­flows con­tinue from China and are turn­ing threat­en­ing,” an­a­lysts at Bank of Tokyo-Mit­subishi UFJ said in a note this week. The PBOC had sold a net $39.2 bil­lion worth of for­eign ex­change in Oc­to­ber, in­di­cat­ing con­tin­ued of­fi­cial in­ter­ven­tion to sup­port the yuan. To be sure, the yuan is fall­ing along­side other emerg­ing mar­ket cur­ren­cies in the face of the strong dol­lar, which is be­ing buoyed by hopes that Pres­i­dent-elect Don­ald Trump will be able to shift the US econ­omy into faster gear. It has been more steady lately against a bas­ket of cur­ren­cies of ma­jor trad­ing part­ners.

But China, with its huge trade sur­plus with the United States, is firmly in Trump’s sights. He has vowed to la­bel China a cur­rency ma­nip­u­la­tor on his first day in of­fice on Jan. 20 and has threat­ened to im­pose huge tar­iffs on im­ports of Chi­nese goods. A se­nior cen­tral bank re­searcher told Reuters last week that Bei­jing needs to break a po­ten­tially de­struc­tive feed­back loop, where ex­pec­ta­tions of fur­ther yuan weak­ness spur out­flows, and fresh cap­i­tal flight in turn puts more pres­sure on the cur­rency. The cen­tral bank is also likely to worry about a faster draw­down of its re­serves, which are ap­proach­ing the closely watched $3 tril­lion level, an­a­lysts said.

French bank So­ci­ete Gen­erale said ear­lier this year that In­ter­na­tional Mon­e­tary Fund guide­lines put $2.8 tril­lion as the min­i­mum pru­dent level for China, which is not far away if re­serves keep fall­ing at the cur­rent pace. Since mid-2014, China’s forex re­serves, which in­clude a hefty amount of US gov­ern­ment bonds, have shrunk by more than the gross do­mes­tic prod­uct of Switzer­land. “Our base­line is that tight­ened cap­i­tal con­trols en­able the au­thor­i­ties to stay the course dur­ing the Trump dol­lar rally, which on ING’s fore­casts will per­sist through the first quar­ter of 2017,” Tim Con­don, ING’s chief Asia econ­o­mist, wrote in a note. — Reuters

But he warned that cap­i­tal out­flows dur­ing the dol­lar rally could be­come “ex­ces­sive”. The State Ad­min­is­tra­tion of For­eign Ex­change (SAFE) has be­gun vet­ting transfers abroad worth $5 mil­lion or more and is in­creas­ing scru­tiny of ma­jor out­bound deals, even those with prior ap­proval, sources said last week. Cur­rency an­a­lysts polled by Reuters ex­pect the yuan to plumb its low­est level in nearly a decade next year on sus­tained cap­i­tal out­flows and fur­ther gains in the dol­lar. China’s gold re­serves fell to $69.785 bil­lion at end-Novem­ber from $75.348 bil­lion at endOc­to­ber.

— AFP

BEI­JING: Photo shows Chi­nese 100 yuan notes. China’s for­eign ex­change re­serves plunged by $69 bil­lion in Novem­ber to a five-year low, ac­cord­ing to cen­tral bank data re­leased on De­cem­ber 7, 2016 as pol­icy-mak­ers bat­tled to sup­port the yuan cur­rency against a resur­gent dol­lar.

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