China’s Foreign Exchange Reserves Poised to Report Second Straight Monthly Drop

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Foreign Exchange

China’s foreign exchange reserves are poised to report a second straight monthly drop as the country was busy in intervening and supporting its local currency, the yuan. On Sunday, the People’s Bank of China will publish the figures, which are expected to fall to $3.2 trillion in January representing a drop of $118 billion. The drop could exceed December’s $108 billion fall.

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Propping Up a Weakening Currency

China has already witnessed a capital outflow of $1 trillion last year amid flagging growth as policy makers were busy defending the yuan, which weakened to a five-year low in December. That was because the People’s Bank of China placed restrictions on the rate at a surprisingly weak level. That signaled that it was ready to tolerate depreciation even as the country’s growth is slowing down. Last year, the total draw-down was over $500 billion and capped the first yearly drop in foreign exchange reserves since 1992.

Oppenheimer Funds’ Chief Investment Officer Krishna Memani said that China was recording a considerable outflow of capital with astounding reductions in their capital account. He said that the economy alone could not turn the situation around and that policy makers would have to intervene. He blamed the accelerated draw-down on the surprise devaluation of its local currency last August. As a result, reserves dropped $94 billion in that month alone, which was a record at that point in time.

Reserves Still the Largest

In 2014, China’s foreign exchange reserves swelled to nearly $4 trillion from about $21.2 billion in 1993 representing growth by a factor of nearly 200. Despite dropping 17% since then, the country’s foreign exchange reserves continue to the largest horde in the world and are near triple that of Japan, which has the second biggest stockpile.

Barclays PLC (NYSE:BCS) Chief Economist for China, Jian Chang, expects a $140 billion drop in foreign exchange reserves, which was one of the largest estimated drops in the survey of economists. The survey indicated that Azhou Hao, Commerzbank AG, and two more expect the reduction of reserves to be $80 billion. For the current year, the country expects growth to be 6.5 – 7%.

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