China’s FX Reserves Decline Amid Yuan Support, Weaker Euro

  • Stockpile has dropped by more than $400 billion this year
  • PBOC has been intervening to prop up the yuan amid SDR push

China’s foreign-exchange reserves declined last month to the lowest level since February 2013 as the central bank sold dollars to prop up the local currency ahead of approval from the IMF for the yuan to be included in its basket of reserve currencies.

The currency hoard dropped by $87.2 billion to $3.44 trillion at the end of November, from $3.53 trillion a month earlier, according to People’s Bank of China data released Monday, extending this year’s decline to $405 billion. The median forecast of economists surveyed by Bloomberg was $3.49 trillion. Declines in the euro, yen and British pound last month may have also weighed on the U.S. dollar value of reserves.

The figure may not capture all the PBOC’s intervention efforts as the central bank also transacts in the forwards market to support the currency. The yuan’s addition to the International Monetary Fund’s Special Drawing Rights basket will take effect on Oct. 1, 2016. Analysts including those at Goldman Sachs Group Inc. forecast a depreciation next year as capital heads overseas, the economy slows and the central bank reduces support.

“The pressures of yuan depreciation and capital outflows still exist," said Larry Hu, head of China Economics at Macquarie Securities Ltd. in Hong Kong. "China has more than enough foreign-currency reserves. It’s quite possible that the hoard will drop to about $3 trillion at the end of next year."

Reduced Interventions

The offshore yuan slipped 0.32 percent to 6.4671 a dollar as of 5:07 p.m. in Hong Kong, according to data compiled by Bloomberg.

The long-term goal is for very few interventions, PBOC Deputy Governor Yi Gang said at a briefing last week, adding that larger two-way currency fluctuations are normal.

"After joining the SDR, the PBOC will gradually reduce its intervention in the currency market to meet the commitment of expanding the range of yuan fluctuations," Zhu Qibing, a Beijing-based analyst at China Minzu Securities Co. wrote in an e-mail.

Ding Shuang at Standard Chartered Plc estimated the valuation effect stemming from currency moves accounted for about $35 billion of the drop in November and PBOC net selling for $50 billion to $60 billion.

"By focusing on a basket of currencies instead of against the dollar, there will be less need for PBOC intervention in 2016," Ding wrote in an e-mail. "But continued capital outflows may reduce foreign-exchange reserves further, although probably not as much as in 2015."

Ding said there’ll need to be four to five cuts to banks’ reserve-requirement ratios in 2016 to maintain adequate liquidity.

— With assistance by Xiaoqing Pi

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