PBOC’s Reserves Decline by Record on Intervention, Euro’s Slide

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China’s foreign-exchange reserves slid the most on record in the last three months, fueling speculation the central bank sold holdings to support the yuan as money flowed out of the world’s second-largest economy.

The reserves dropped $113 billion to $3.73 trillion, the third straight quarterly decline, data from the central bank showed Tuesday. Yuan positions on the People’s Bank of China’s balance sheet, a barometer of capital flows, slid a record 252.1 billion yuan ($40.6 billion), according to a separate statement. China’s broadest measure of credit growth fell short of analyst estimates in March.

“The PBOC intervened in the first quarter because capital outflows were serious,” Hu Yuexiao, an economist at Shanghai Securities Co., said by phone. “An advancing dollar and weak economic fundamentals in China caused the capital outflows, which will probably continue this year. So the central bank will keep intervening to keep the currency stable.”

While the PBOC doesn’t disclose the makeup of its reserves, an 11 percent drop in the euro in the first quarter would have weighed on the dollar value of its holdings. Purchases of its own currency to offset weakness are a reversal from years of doing the opposite to keep the yuan competitive.

The greenback strengthened against 14 of 16 major currencies in the first quarter, according to data compiled by Bloomberg. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 leading counterparts, jumped 6.2 percent.

“The dollar has been very strong over the past quarter, and that’s affected the value of Chinese reserves held in other currencies,” said Mark Williams, chief Asia economist at Capital Economics Ltd. in London. “The days of massive intervention by the People’s Bank to stop the yuan from strengthening are over.”

PBOC Intervention

Falling yuan positions at Chinese financial institutions in January suggested the central bank had intervened to curb yuan weakness, Barclays Plc and Goldman Sachs Group Inc. said in research notes published in the past two months.

The loss of reserves could “be affected by the PBOC’s intervention to shift the RMB from depreciation to modest appreciation in recent months,” economists led be Liu Li-Gang at Australia & New Zealand Banking Group Ltd. wrote in a note, referring to the abbreviated form of renminbi, the alternative name for China’s currency.

Credit Slows

Aggregate financing, China’s broadest measure of credit growth, was 1.18 trillion yuan in March, less than the median estimate of 1.5 trillion yuan in a Bloomberg survey of economists. M2 money supply increased 11.6 percent in March from a year earlier, slower than last month’s 12.5 percent and missing economists estimates for 12.4 percent.

Australia’s currency -- seen as a proxy for bets on China’s economy -- deepened declines after the credit data suggested there’s yet to be a sustained pick-up in lending growth. The PBOC cut benchmark interest rates twice and reduced the amount of reserves banks have to set aside in the past six months.

Gross domestic product data scheduled for Wednesday will probably show the economy expanded 7 percent in the first quarter from a year earlier, according to the median estimate of economists in a Bloomberg survey. That would be the slowest pace since the first quarter of 2009.

PBOC Governor Zhou Xiaochuan last month said the country’s economic expansion has slowed “a bit too sharply” and it has “room to act” with interest rates and quantitative measures.

The two rate cuts have lowered bank loan interest rates to 6.32 percent at the end of March, down 12 basis points from December, the central bank’s survey system covering nearly 300 lenders and over 3,000 branches shows, Sheng Songcheng, the PBOC’s statistics chief, wrote in a statement. A large number of off-balance sheet financing activities are moving on to banks’ books, reducing financial risks, Sheng wrote.

“De-leveraging in China’s shadow banking is continuing,” said Yao Wei, a Paris-based China economist at Societe Generale SA. “It’s a positive development in terms of reducing financial risks, but it also means less credit in the overall economy to darken short-term growth prospects.”

— With assistance by Xiaoqing Pi, and Tian Chen

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