For the first time in nearly six years, China’s foreign exchange reserves fell by $12.3 billion in January to $2.998 trillion, compared with a drop of $41 billion to US$3 billion in December 2016.
A statement from the State Administration of Foreign Exchange blamed seasonal factors for the larger than expected fall, including forex purchases for overseas travel and bond repayments. “China’s capital outflow has moderated a lot and it will move towards a balance in the future,” it said. “The current reserves are adequate.”
The fall could undermine any positive moves seen in economies and markets over the last 12 to 18 months. Some analysts fear a prolonged erosion of China's reserves could prompt a sudden devaluation of the renminbi, which could in turn spark turmoil on global markets and exacerbate tensions with the Trump administration in the US.
The yuan fell 6.6 percent against the rising dollar in 2016, its biggest yearly drop since 1994. The depreciation accelerated a flight of capital offshore through China's surprisingly porous exchange regulations.
When the US dollar index rose 7.1 per cent in the fourth quarter of last year on Donald Trump’s US presidential victory and the Federal Reserve’s interest rate increase, the Chinese government was scrambling to restrict outbound investment and individual forex purchases.
However, Trump’s withdrawal from the Trans-Pacific Partnership deal have helped correct the appreciation of the dollar, which dropped 2.7 per cent last month. Now that a consistent strengthening of the dollar is less likely this year, Beijing is better positioned to manage outflows and defend its exchange rate.
"With $3 trillion viewed by some as an important threshold, this decline will likely spark renewed debate over how long the People's Bank can continue intervening to support the renminbi," says Capital Economics China economist Julian Evans-Pritchard. "Our view is that the PBOC can afford to keep selling FX (foreign exchange) at the current pace for a long time."