China’s foreign-exchange reserves shrank to the smallest since 2012, indicating that the central bank sold US dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure.
The world’s largest currency hoard declined by US$99.5 billion last month to US$3.23 trillion, according to a People’s Bank of China (PBOC) statement released yesterday. The drop was less than a Bloomberg survey’s median estimate of a US$120 billion loss. The stockpile fell by more than half a trillion dollars last year, the first-ever annual decline.
China increased its gold hoard last month, raising its holdings to 57.18 million ounces at it looks to diversify its foreign-exchange stockpile, the PBOC data show.
Policymakers fighting to hold up the weakening yuan amid slower economic growth, plunging stocks and increasing outflows have been burning through the reserves. The draw-down has continued since the central bank’s surprise devaluation of the currency in August last year, when the stockpile tumbled US$94 billion, a monthly record at the time.
WAR CHEST
“While the remaining reserves represent a substantial war chest, the rapid pace of depletion in recent months is simply unsustainable,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.
“Domestic private investors and global currency traders see a one-way bet against the currency. This has resulted in large-scale private capital outflows since early 2015 as expectations mount that the PBOC will eventually be forced to capitulate once its reserves are sufficiently depleted,” Biswas said.
Capital outflows increased to US$158.7 billion in December last year, the most since September and were US$1 trillion last year, according to estimates from Bloomberg Intelligence. That is more than seven times the amount of cash that left in 2014.
The PBOC has stepped up efforts to stem the exodus, warning speculators that they will be punished. It intervened in the Hong Kong market last month after the yuan’s offshore exchange rate sank to a record 2.9 percent discount to the onshore rate.
Apart from selling US dollars, the monetary authority also gave guidance to some Chinese lenders in the city to suspend yuan lending to curb short selling, a move that contributed to the overnight interbank lending rate surging to an all-time high of 66.8 percent on Jan. 12.
“The smaller decline in the reserves suggests that some capital outflow restrictions imposed in January worked,” Shen Jianguang (沈建光), chief Asia economist at Mizuho Securities Asia Ltd in Hong Kong, wrote in a note yesterday, adding that he estimates the drop this month will be “much smaller.”
The median estimate in a Bloomberg survey is for the yuan to drop to 6.76 per US dollar by the end of this year, with Rabobank Group the most pessimistic with a 7.53 prediction.
The Chinese currency has declined 1.24 percent so far this year, closing at 6.5755 in Shanghai on Friday. Chinese financial markets are shut for the Lunar New Year holiday.
BORROWING BAND
Separately, the PBOC said it will explore ways of creating a band to guide the country’s borrowing and lending costs as China aims for market-oriented interest-rate benchmarks to help the economy recover from its slowest growth in decades.
China’s top economic planner said that the objective for this year is for an expansion in the range of 6.5 percent to 7 percent. The 6.9 percent growth last year was the slowest in 25 years.
The central bank will consider an interest-rate corridor mechanism for managing rates, it said in the latest quarterly monetary policy report released on Saturday.
The PBOC lowered short-term borrowing costs for smaller banks in November last year in a move toward setting the Standing Lending Facility rate as the ceiling and interest on excess bank reserves as a floor for rates.
The PBOC reiterated that it will continue with prudent monetary policy that will be fine-tuned at the appropriate time as it still sees downward pressure on Chinese economy, adding that it also seeks to implement “targeted reserve ratio cut” measures to support economic restructuring.
Across-the-board cuts to banks’ reserve requirement ratios may increase depreciation pressure on the yuan’s depreciation, causing capital outflows and a decline in forex reserves, the Chinese central bank said.
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