By Frank Tang
China’s foreign exchange reserves have dropped below the psychological level of US$3 trillion for the first time since February 2011.
The reserves fell by US$12.3 billion last month, a smaller decline than in December, but still larger than expected in light of strict capital account measures adopted at the end of last year and a falling US dollar.
The reserves stood at US$2.9982 trillion at the end of last month.
“The US$3 trillion threshold is more of a psychological thing,” Julian Evans-Pritchard, a China analyst at Capital Economics, said. “The capital outflows were largely eased given that yuan appreciation last month created a sign of two-way fluctuations and control measures were implemented strictly.”
China’s foreign exchange regulator tried to put a brave face on the figures released on Tuesday.
A statement from the State Administration of Foreign Exchange blamed seasonal factors for the larger than expected fall, including forex purchases for overseas travel and bond repayments.
“China’s capital outflow has moderated a lot and it will move towards a balance in the future,” it said. “The current reserves are adequate.”
When the US dollar index rose 7.1 per cent in the fourth quarter of last year on Donald Trump’s US presidential victory and the Federal Reserve’s interest rate increase, the Chinese government was scrambling to restrict outbound investment and individual forex purchases.
However, the recent protectionist actions by Trump, such as his withdrawal from the Trans-Pacific Partnership trade pact, have helped correct the overshooting of the greenback. The US Dollar Index responded to these moves by dropping 2.7 per cent last month.
A weaker US dollar increases the value of non-dollar-denominated currencies in China’s portfolio. Now that a consistent strengthening of the dollar is less likely this year, Beijing is better positioned to manage outflows and defend its exchange rate.
“Considering such domestic factors as a bond market opening-up, capital outflows could be further narrowed and the fall of forex reserves will also slow in 2017,” Xie Yaxuan, a macro analyst at China Merchants Securities, said.
Louis Kuijs, head of Asia economics at Oxford Economics, believes that China is likely to eventually opt for more forceful measures in order to stabilise its forex reserves.
“Policymakers will consider [such measures] a price worth paying, [that] will result in less long-term reputational damage than the alternative of a significant depreciation under pressure from outflows,” he wrote in a research note.
While the US$3 trillion line has no real meaning, it could influence investor sentiment towards the yuan.
Beijing has been using its reserves to prop up the value of the yuan in the forex market.
South China Morning Post