China FX Reserves – The foreign currency reserves of China declined by $107.9 billion to $3.33 trillion, the biggest monthly drop ever recorded—which was primarily driven by increasing concerns regarding the country’s slowing economy.
For the full year 2015, China’s foreign currency reserves fell $512.66 billion, the biggest annual decline on record, according to central bank data on Thursday. Since May, the country’s foreign currency reserves fell every month except one.
Based on the data, the People’s Bank of China (PBOC) is spending large amounts of dollars to support the yuan amid the slowing economic growth, the market selloff as well as the start of higher interest rates in the United States.
On Thursday, the yuan slid to a five-year low as the central bank reduced its reference rate to a weak level. Last month, China created a yuan index composed of 13 currencies and stated that the performance of the yuan should not be weighed only against the dollar.
China is becoming an exporter of capital
Oliver Barron, head of research at North Square Blue Oak, an investment bank, said, “It certainly confirms the end of an era. What we’ve been seeing is China now becoming an exporter of capital.”
Chen Xingdong, the chief China economist at BNP Paribas, said, “It’s inevitable: The PBOC is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure. The PBOC now wants to maintain stability in the yuan index and not versus the U.S. dollar.
Wang Tao, chief China economist at UBS Group in Hong Kong, commented that the Chinese government will “allow more depreciation, use reserves and tighter controls on cross-border capital outflows.”
Wang believes that the yuan will depreciate further against the dollar this year. She estimated that the country’s foreign currency reserve would decline to $3 trillion.
China FX Reserves – Preventing losses in foreign-exchange reserves will be difficult for PBOC
Nathan Chow, an economist at DBS Group Holdings in Hong Kong, noted that Chinese authorities were worried about the country’s economy based on the extent of the reduction of the central bank’s reference rate this week. China’s economy is being challenged by increasing downward pressure.
According to Chen, the long-term trend has not changed considering the weak fundamentals—the yuan will weaken, and capital will leave China.
On the other hand, Zhao Yang, the Hong-Kong-based chief China economist at Nomura Holdings suggested that it would be difficult for the PBOC to stop the losses in foreign-exchange losses when there are capital outflows.
He explained that China suffered a significant decline in foreign currency reserves because the PBOC didn’t want the yuan to depreciate too fast. According to him, the central bank needs a large-scale intervention in the spot market to support the yuan.
China’s gold reserves
The central bank’s data showed that China’s gold reserves have a value of around $60.19 billion by the end of December, up from $59.52 billion in the previous month. The country has 56.66 million fine troy ounces of gold by the end of December, up from 56.05 million in November.
The country’s International Monetary Fund (IMF) reserve position fell from $4.60 billion to $4.55 billion. China held $10.28 billion of IMF Special Drawing Rights in December compared with $10.18 billion in the previous month.