China Foreign-Exchange Reserves Extend Slump

Updated on
  • Currency hoard shrinks by $108 billion to $3.33 trillion
  • Decline in reserve holdings exceeds estimates by economists

Global Market Turmoil From China's Yuan Devaluation

China’s foreign-exchange reserves slid more than forecast in December, capping their first-ever annual decline, as authorities sought to prop up a weakening yuan.

The currency hoard shrank by a record $108 billion to $3.33 trillion in December, the People’s Bank of China said Thursday. The median forecast of economists surveyed by Bloomberg was for a drop to $3.42 trillion. The reserves fell by more than half a trillion dollars in 2015.

Policy makers fighting to stem declines in the currency amid slower growth and plunging stocks have been burning through the stockpile to reduce yuan volatility. The yuan sank to a five-year low on Thursday as the PBOC set its reference rate at an unexpectedly weak level, a signal that it’s more tolerant of depreciation as growth slows. China set up a new yuan index composed of 13 currencies in December, saying that the yuan’s performance shouldn’t be measured against the dollar alone.

"It’s inevitable: The PBOC is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure," said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. "The PBOC now wants to maintain stability in the yuan index and not versus the U.S. dollar.”

The weakening of the fixing contributed to a selloff in stocks that led exchanges to close early on Monday and Thursday after the retreat triggered new circuit-breaker mechanisms. China’s CSI 300 Index plunged 7.2 percent Thursday.

The government will "allow for more depreciation, use reserves and tighter controls on cross-border capital flows," said Wang Tao, chief China economist at UBS Group AG in Hong Kong. The yuan will continue to decline against the dollar this year and foreign reserves will drop to $3 trillion, she said.

Weakening Trend

"The fact that the central bank cut the fixing so much this week signaled that the authorities are worried that the economy is challenged by increasing downward pressures," said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. "Considering the weak fundamentals, the long-term trend for the yuan to weaken and for the capital to leave the nation hasn’t changed."

The drop in the stockpile would have been even greater had it not been for strength in other currencies that China holds in reserve. The stronger euro and yen in December helped lift the valuation of the reserves, which are reported in U.S. dollars.

The world’s second-largest economy expanded 6.9 percent last year, the slowest pace since 1990, according to the median forecast of economists surveyed by Bloomberg. The government will release fourth-quarter gross domestic product data on Jan. 19.

“When there are capital outflows, it’s difficult for the central bank to stem the loss in foreign-exchange reserves,” said Zhao Yang, the Hong Kong-based chief China economist at Nomura Holdings Inc. “The PBOC didn’t want the yuan depreciation to be too fast; that’s why the reserves drop was quite big. Use of forwards can help stabilize the exchange rate, but the effect is quite limited. Large-scale intervention in the spot market is needed to support the currency.”

— With assistance by Xiaoqing Pi, Kevin Hamlin, Justina Lee, Tian Chen, Richard Frost, and Helen Sun

(Updates to add new index in third paragraph.)
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