“Our foreign reserves started to decline from the end of September, then in October, November and as of now this month, are basically falling every day,” said Li, now a vice president at the government-backed Chinese Academy of Social Sciences, which does research and analysis on public policy. Li’s comments were published in an online transcript of the forum on the state-run china.com.cn website.
China’s world-record foreign-exchange reserves increased the least in more than a decade last quarter and declined in September for the first time in 16 months, according to the central bank, which releases the data on a quarterly basis. Li didn’t say how he knew that foreign reserves were falling or give a reason for the declines.
More signs of slowing capital inflows into China emerged when a separate central bank report last month showed financial institutions sold a net 24.9 billion yuan ($3.9 billion) in foreign currencies in October. That number, also called the position for foreign-exchange purchases, is watched by analysts for signs of inflows or outflows of so-called hot money. Foreign funds also enter China through trade and investment.
The entry of foreign currency into China fuels growth in the nation’s money supply, instead of spurring appreciation of the yuan, because the central bank limits the currency’s gain. In response, the central bank sold bills and ratcheted up reserve requirements for lenders during the past two years to rein in liquidity.
Reserve Ratio Cut
The People’s Bank of China last week cut the amount of cash banks are asked to set aside as reserves, the first such move in three years. Li, the former bank adviser, said today the reserve ratio reduction was in response to the decline in the nation’s foreign-exchange reserves. Official reserves stood at $3.2 trillion by the end of September, according to the latest available data.
“If foreign reserves do not increase as fast, China’s money supply expansion won’t face as much pressure,” Li said. Less foreign currency inflow has also led to more “two-way” fluctuations and even depreciations in the yuan’s exchange rate in the past few months, he said.
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