China’s forex reserves at 2-year low

China’s foreign exchange reserves, the largest in the world, dropped by United States dollars 87.2 billion to USD 3.44 trillion in November amid a slowdown of besides surge in its outbound direct investment (ODI). Our calculations suggest that exchange rate fluctuations will have reduced the dollar value of the portion of the reserves held in other currencies by around $30bn. In the third quarter of 2015, forex reserves fell by $180 billion, much more than the $40 billion decrease in the second quarter, a fifth consecutive quarterly drop.

Policymakers and market players have been keeping a closer eye on the reserves since China’s central bank devalued the yuan by about 2 per cent in August, prompting worries over possible further weakening of the Chinese currency.

“A rise in offshore interest rates due to the increased likelihood of a December Fed rate hike will also have added to outflow pressures”.

However, Capital Economics believed the People’s Bank of China would not allow a significant depreciation, because it could hamper greater take-up of the yuan in worldwide transactions, one of its stated aims.

The figure may not capture all the PBOC’s intervention efforts as the central bank also transacts in the forwards market to support the currency.

“Recall what happened in August and September: USD-CNY was stable despite soaring trading volumes, as the central bank sold USD aggressively to safeguard its currency. The difference shows that a “managed depreciation” in CNY is acceptable from Chinese authorities’ perspective”.

Ding said there’ll need to be four to five cuts to banks’ reserve-requirement ratios in 2016 to maintain adequate liquidity. The IMF announced on November 30 that it would include the yuan in its Special Drawing Rights (SDR) basket, an important milestone in China’s integration into global finances.