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