China’s foreign exchange reserves posted their third-largest monthly decline on record last month, central bank data showed on Monday, renewing worries about capital outflows after reserves had appeared to stabilise.
Forex reserves fell $87bn in November, near the record $94bn decline suffered in August — the same month that the central bank surprised global markets by allowing the renminbi to depreciate by 3 per cent in three days.
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China’s reserves have fallen for nine of 11 months this year and stand at $3.43tn, as investors sell renminbi assets to protect themselves against depreciation and the central bank sells dollars from its reserves to curb renminbi weakness. Falling interest rates in China and expectations of an imminent rate hike by the US Federal Reserve have also fuelled outflows. Reserves rebounded mildly in October, suggesting outflows had diminished.
China’s forex reserves — the world’s largest — have long been seen as the ultimate guarantor of financial stability, since they can be used to hedge against capital flight or to bail out domestic financial institutions struggling with a rise in bad debts.
The unprecedented declines have raised worries that the reserves could quickly evaporate if capital outflows continue and the central bank continues to defend the exchange rate. Most analysts believe the central bank will eventually be forced to curtail its intervention in order to prevent further depletion of its reserves.
The People’s Bank of China has long intervened in foreign-exchange markets to hedge against excessive volatility. Since August, however, such intervention has expanded from the domestic spot market, which covers daily transactions, to include the offshore renminbi market in Hong Kong, as well as both onshore and offshore futures markets, traders say.
Following the devaluation in mid-August, the renminbi rallied in September and October. Devaluation resumed in November, however, and the renminbi closed at its weakest level in three months at 6.4082 to the dollar on Monday.
“Since October many countries around China have experienced some capital outflow, and China has had its share,” said Xie Yaxuan, economist at China Merchants Securities in Shenzhen. “The strengthening dollar is bound to cause some repositioning into dollar assets.”
Ms Xie estimates that around 40 per cent of the decline in November — about $35bn — is attributable to valuation effects related to the weakening of the euro and other currencies against the dollar in November, rather than outflows. When the non-dollar currencies weaken, the dollar-denominated value of non-dollar assets held in China’s reserves declines.
