China’s foreign exchange reserves dropped for the first time in more than a decade as foreign investment moderated, the trade surplus narrowed and Europe’s debt crisis spurred investors to sell emerging market assets.
The holdings, the world’s largest, fell from US$3.2 trillion on Sept. 30 to US$3.18 trillion on Dec. 31, data released by the People’s Bank of China showed yesterday. The quarterly drop was the first since the Asian financial crisis in the second quarter of 1998, according to data compiled by Bloomberg.
The decline underscores forecasts for the central bank to ease monetary policy, and could bolster China’s resistance to any appreciation in its currency. People’s Bank of China Governor Zhou Xiaochuan (周小川) said in remarks published this month that a global downturn could lead to “large” capital withdrawals this year, highlighting a shift in risk from the influx of speculative funds that China opposed during the 2009 to 2010 world economic rebound.
“It indicates an absence of flow pressure for the yuan to appreciate, which might lead the central bank to slow the pace of appreciation,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore. “This will also reduce the need to absorb hot money inflows, allowing the central bank to cut banks’ required reserve ratio.”
Condon, who previously worked at the World Bank, said the People’s Bank of China could lower the ratio of assets banks must hold in reserve by 2 percentage points this year. The bank cut the ratio for the first time since 2008 last month.
China’s foreign exchange holdings reached a record US$3.27 trillion in October and then fell for the following two months, central bank data showed, indicating a decrease of US$92.6 billion in November and last month.
Much of the decline could be because of the lower value of the reserves held in currencies other than the US dollar, said Cui Li (崔麗), a Hong Kong-based economist at Royal Bank of Scotland who previously worked at the IMF.
Although China does not provide details on the distribution of its holdings, the country bought euros last year, with policymakers flagging support for efforts to aid Europe’s battle to resolve its sovereign-debt crisis. The euro fell 3.2 percent against the US dollar in the last quarter of last year.
The drop in holdings was the first since the Asian financial crisis in 1998, when nations from South Korea to Thailand saw reserves depleted as investors fled the region. East Asian nations later rebuilt their holdings and restructured their financial systems, helping the region lead the global economic rebound over the past three years.
Countries including South Korea, Indonesia and India used some of their reserves to support their currencies in September last year, when European debt woes deteriorated as Greece teetered on the brink of a potential disorderly default. The MSCI Asia Pacific Index of stocks dropped 16 percent in the second half of last year, when the Shanghai Composite Index slid 20 percent.
For China, the Europe debt crisis has hit the nation’s exports, which rose at the slowest rate in two years last month, adjusted for holiday period distortions. For last year, the trade surplus narrowed 14.5 percent to US$155 billion, the third straight annual decline since a record US$298 billion in 2008.