China Reserves Post First Yearly Drop Since 1992 Amid Yuan Slide

  • Currency hoard plunged $513 billion to $3.33 trillion in 2015
  • 'A major turning point in the history of Chinese development'

China’s foreign reserves shrank last year for the first time since 1992, ending a 22-year ascent that began under former top leader Deng Xiaoping and accelerated with presidents Jiang Zemin and Hu Jintao.

The currency hoard plunged by $513 billion in 2015 to $3.33 trillion as of Dec. 31, the People’s Bank of China said Thursday. It was dragged down down by factors including central bank intervention to prop up the yuan after an August devaluation roiled global markets and capital flight from the world’s second-largest economy, analysts said.

Reserves were swelled for more than two decades by foreign capital pouring in to an economy expanding at an average 10 percent clip a year and a trade surplus fueled by exporters seizing market share overseas. Now policy makers are fighting to hold up the currency amid slower growth and plunging stocks, burning through assets to reduce yuan volatility.

“The switch from reserve accumulation to decline is a major turning point in the history of Chinese development,” said Freya Beamish, a London-based economist at Lombard Street Research Ltd. “It signifies a reversal of China’s role in the U.S. Treasuries market from buyer to seller. China is still a large excess saver, but it’s now reducing those savings and the foreign-exchange reserve decline is a result of that.”

The yuan sank to a five-year low on Thursday, weakening as much as 0.6 percent to 6.5956 per dollar, as the PBOC set the reference rate at an unexpectedly weak level, a signal that it’s more tolerant of depreciation as the expansion slows.

With the slowest economic growth in a quarter century, a long-held expectation that the yuan is a one-way appreciation bet has given way to a median forecast that the currency will depreciate to 6.64 per dollar this year.

Private Investment

“In the past, outflow of saving was dominated by the government building foreign-exchange reserves,” said Barry Naughton, a professor on the Chinese economy at the University of California in San Diego. “Now businesses and private parties are building their external positions.”

The plunge in reserves came in a landmark year for the yuan with the International Monetary Fund granting reserve currency status in its Special Drawing Rights currency basket, along with the dollar, yen, euro and pound. Standard Chartered Plc and AXA Investment Managers have predicted at least $1 trillion of global reserves will convert to Chinese assets after the yuan formally joins the IMF’s reserve basket in October.

China’s foreign-exchange reserves surged nearly 200-fold from just $21.2 billion in 1993 to a peak of almost $4 trillion in 2014. As far back as April 2011, PBOC Governor Zhou Xiaochuan said China’s reserves exceeded a “reasonable” level and spoke of the need to reduce an excessive accumulation. The holdings had topped $3 trillion a month earlier. 

“A moderating forex balance is sensible for China -- it’s a necessary reflection of capital account opening and the illogic of hoarding an unnecessarily large volume of other people’s currencies,” said Daniel Rosen, a partner at Rhodium Group LLC, a New York-based economic-research firm that specializes in China. “But the present uncertainty surrounding Chinese financial policies will lead the majority of observers to interpret this turning point as a sign of trouble.”

China’s holdings of U.S. Treasuries stood at about $1.25 trillion in October 2015, little changed from the end of 2014, according to the U.S. Treasury Department, which cautions that the figures may not reflect the true ownership of securities held in a custodial account in a third country.

China’s capital account is experiencing a shift with its domestic private sector having a huge demand for foreign assets for diversification, said London-based Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former IMF economist.

“This is a genuine structural turn in China’s official reserves,” he said. “In the last 15 years, China was the world’s main exporter of goods. But in the coming years, China will likely be the world’s main exporter of capital.”

— With assistance by Kevin Hamlin

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