China FX Reserves Slip to Four-Year Low on Strong Greenback

  • Holdings dropped $28 billion to $3.19 trillion in May
  • Drop due to valuation effect of stronger dollar: CBA’s Li Wei

China’s foreign-exchange reserves slipped to the lowest level since late 2011 as a rallying dollar ate into the value of its holdings.

The world’s largest currency hoard fell by $28 billion to $3.19 trillion in May, the People’s Bank of China said in a statement Tuesday. That was almost in line with the $3.2 trillion median forecast of economists surveyed by Bloomberg.

"Depreciation expectations faded and the central bank didn’t burn its reserves to intervene in the foreign exchange market," said Li Wei, a China and Asia economist at Commonwealth Bank of Australia in Sydney. "The drop was largely due to the valuation effect of a strong dollar, which leads to the depreciation of other currencies."

That was confirmed by the reserves figure denominated in International Monetary Fund Special Drawing Rights, which rose to 2.28 trillion units from 2.27 trillion in May.

Despite fresh weakness against the greenback, the PBOC hasn’t had to deplete its cash to support the yuan as some stability returns to the currency. While reserves have been generally steady this year, halting the steep decline of 2015, the May tally extends the decline to 20 percent from the near $4 trillion peak in June 2014.

Both the Japanese yen and euro weakened against the greenback last month, weighing on the value of the reserves, which are reported in U.S. dollars.

"Movements in the dollar are likely to continue to play a key role in driving outflow pressures," Julian Evans-Pritchard, a China economist at Capital Economics Ltd. in Singapore, wrote in a note. "Depreciation expectations remain much more manageable."

He estimated net capital outflows of $32 billion in May, down from the $120 billion per month pace seen late last year and early this year.

A Fed interest rate rise would lead to a stronger dollar, which would prompt capital to flow back to the U.S. and cause weakness in emerging market currencies, PBOC Deputy Governor Yi Gang at said at a briefing Tuesday on the sidelines of the U.S.-China Strategic and Economic Dialogue in Beijing.

Fed Pace

"Many people are concerned about capital flows," Yi said. "In the future, the question is what will be the pace and the intensity of Fed rate hikes."

The yuan posted its biggest two-day drop versus peers since February, spurring speculation authorities are weakening the currency to counter a slowing economy. The Chinese currency has fallen 0.8 percent against a trade-weighted basket this week to the lowest level since October 2014.

The hoard will extend the drop in coming months when Fed rate-hike expectations revive, said Ding Shuang, head of greater China economic research at Standard Chartered Plc in Hong Kong. "But it’ll drop rather slowly, since China still has strong capital controls."

— With assistance by Xiaoqing Pi, and Yinan Zhao

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