China Forex Reserves Fall to Lowest Level in More Than Two Years
Numbers suggest Beijing is struggling to control capital outflows as a U.S. rate increase looms
China’s foreign-exchange hoard fell in November to its lowest level in more than two years, reigniting concerns about Beijing’s ability to stem the outflow of capital from the world’s second-largest economy.
The decline followed a short-lived recovery in October and suggests that funds have resumed leaving China’s shores amid rising expectations of a U.S. interest-rate increase and worries about China’s slowing economic growth. China in recent months has tightened its already stringent capital controls to keep needed funds within the country, an about-face from its longtime status as a catch basin for global investment.
China’s foreign-exchange reserves declined by $87.22 billion from a month earlier to $3.438 trillion at the end of November, the People’s Bank of China said Monday. That was the lowest level since February 2013, when reserves were $3.395 trillion.
In October, China’s foreign-exchange reserves rose by $11.39 billion after five months of declines.
Policy makers and market participants have been keeping a closer eye on the reserves since China’s central bank devalued the yuan by about 2% in August, prompting worries over possible further weakening of the Chinese currency. That led to a record $93.9 billion drop in reserves in August as Beijing moved to shore up the currency.
Ding Shuang, an economist with Standard Chartered PLC, predicted that China’s central bank may have sold a net $50 billion in reserves last month to prevent the yuan from weakening too fast. The rest of the decline may be attributable to depreciation of the central bank’s nondollar assets amid rising expectations of a U.S. interest-rate increase, he said.
“China’s central bank doesn’t want the yuan to fall drastically, but meanwhile it hopes the market forces could guide down the Chinese currency in a gradual manner,” Mr. Ding said.
The U.S. Federal Reserve is widely expected to raise interest rates at its mid-December meeting after keeping its key policy rate at near zero for the past seven years. Such a move would make assets denominated in U.S. dollars more attractive to investors, leading them to take their money out of places like China.
A weaker yuan could provide a boost to China’s anemic export sector, a once-major growth engine for the economy. Amid sluggish demand, China’s exports fell 6.9% from a year earlier in October and are expected to register a drop of 5.3% for November, according to a poll of economists earlier by The Wall Street Journal.
Last week, the International Monetary Fund said it would include the yuan in its eliteSpecial Drawing Rights basket of reserve currencies, along with the U.S. dollar, the euro, the pound and the yen. That triggered worries among some investors that Beijing would stop defending the yuan and now feel free to devalue the currency to prop up its economy, which is on track to report its slowest growth in a quarter century.
Still, some economists say China has reasons to want to curb any weakening of the yuan, also known as the renminbi.
“Although a weaker renminbi could give a mild boost to export competitiveness, the PBOC appears concerned that a depreciation would set back their efforts to encourage increased international use of the currency and could slow the process of economic rebalancing toward consumption,” Julian Evans-Pritchard, an economist with Capital Economics, said in a research note.
PBOC Vice Governor Yi Gang said in a briefing after the yuan’s inclusion that Beijing will manage to keep the yuan “stable at a reasonable and equilibrium level” and continue to intervene in currency markets to prevent excessive fluctuations.