China’s Forex Reserves Show First Decline in Three Months

China’s foreign-exchange reserves fell in March from February in the first monthly decline since the end of last year, central bank data showed, signaling a possible outflow of capital.

The nation’s holdings, the world’s largest, dropped $4.69 billion to $3.305 trillion from a record $3.310 trillion, according to People’s Bank of China figures released today. The first-quarter gain of $124 billion was reported on April 12.

The decline highlights volatility in capital flows that may have contributed to China’s decision this month to widen the yuan’s trading band for the first time since 2007. March’s drop, while smaller than the monthly declines in November and December, indicates the country can no longer rely on foreign-currency inflows to boost domestic liquidity, according to analysts including Dariusz Kowalczyk at Credit Agricole CIB in Hong Kong.

“A reserve-ratio cut remains very likely” this quarter because of the economic slowdown, said Qu Hongbin, Hong Kong-based chief China economist for HSBC Holdings Plc. The country’s inflation is under control while the economic downturn is “obvious,” Qu said.

While today’s data may indicate a “small amount of capital outflows,” the change won’t have a “big impact on monetary policy as the central bank is fully able to adjust liquidity” through channels including bill sales, he said.

Key Factors

The economy expanded 8.1 percent in the first quarter from a year earlier, down from 8.9 percent in the previous three months. Consumer prices rose 3.6 percent in March from a year earlier, the second month the inflation rate was lower than the government’s 2012 target of about 4 percent.

Central bank Governor Zhou Xiaochuan said last month that changes in capital flows and foreign-exchange reserves were key factors in decisions to adjust banks’ reserve requirements. The ratio was cut in February for the second time in three months.

Zhou said that such reductions were not an indication of policy loosening and were instead related to the need to maintain liquidity in financial markets.

Foreign-exchange reserves declined to $3.181 trillion in the fourth quarter from $3.201 trillion at the end of September, the first quarterly drop in more than a decade.

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