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Business

China forex reserves fall in battle to stem capital flight

In November, Beijing depleted its foreign exchange reserves more than expected, as authorities struggled to stem massive outflows of capital in view of a depreciating yuan against a strongly rising US dollar.

According to data released by the People's Bank of China (PBoC) on Wednesday, the central bank's forex reserves fell by $69.06 billion (64.43 billion euros) last month, to $3.052 trillion - the fifth straight month of decline and a level not seen since March 2011. China's gold reserves also fell to $69.7 billion at end-November from $75.348 billion at end-October.

November's drop was the largest since January, when a sharp fall in the yuan and worries about China's slowing economy raised fears that Beijing would devalue its currency, shocking global financial markets.

The central bank is widely believed to have sold US dollars to support the yuan currency as it sunk to more than 8-1/2 year lows. China's foreign exchange regulator said the decline in reserves was partly due to the dollar's 3 percent rally versus major currencies in November.

Struggling to shore up currency

The yuan fell 1.6 percent in November alone, its worst month since August 2015, and adding to a more than 5 percent slide so far this year. China's currency has been falling alongside other emerging market currencies in the face of the rising dollar. The US currency is riding high on hopes that President-elect Donald Trump's economic policy will boost growth in the world's biggest economy.

In addition, the yuan is under pressure following Trump's remarks to label China a currency manipulator on his first day in office on Jan. 20. Moreover, he vowed to impose huge tariffs on imports of Chinese goods to reduce the countries massive trade surplus with the US.

Currency analysts polled by the news agency Reuters expect the yuan to plumb its lowest level in nearly a decade next year on sustained capital outflows and further gains in the dollar.

Important threshold

Currency traders also believe a forex level of $3 trillion is psychologically important for the PBoC because a fall below the mark would risk intensifying outflows of capital from China.

A senior central bank researcher told Reuters that Beijing needed to break a potentially destructive feedback loop, where expectations of further yuan weakness spur outflows, and fresh capital flight in turn puts more pressure on the currency.

International Monetary Fund (IMF) guidelines, for example, put $2.8 trillion as the minimum prudent level for China, which is not far away if reserves keep falling at the current pace.

Under efforts to curb capital flight, China has announced a string of measures in recent weeks to tighten controls on money moving out of the country. The State Administration of Foreign Exchange (SAFE) has begun vetting transfers abroad worth $5 million or more and is increasing scrutiny of major outbound deals, even those with prior approval.

However, this has fuelled market speculation that potentially destabilizing capital outflows are on the rise. Analysts at Bank of Tokyo-Mitsubishi UFJ said in a note this week that the controls were "a very good indicator that capital outflows continue from China and are turning threatening."

But Tim Condon, ING's chief Asia economist, told Reuters that the measures could be enable Chinese authorities "to stay course during the Trump dollar rally," which would persist through the first quarter of 2017 in the bank's perception.

uhe/kd (Reuters, dpa)

 

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