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China’s Foreign Reserves Drops $100 Billion In January

ChinaLatest reports show that China’s foreign exchange reserves saw a drop of $99.5 billion in January to $3.23 trillion. This is the lowest level of reserves held by China since May 2012.

China’s foreign exchange reserves have been declining at a rapid pace over the last year as it battles a depreciating yuan, falling eight out of the past nine months.

The January decline is however lesser than what was expected by analysts who had predicted a drop of close to $120 billion. The month of December saw the biggest fall when it depleted by $107.9 billion.

China’s central bank People’s Bank of China (PBOC) has been actively trying to manage this volatile economic situation by selling dollars to control the steady fall in the value of yuan after its initial devaluation in August 2015.

Fears of a slowdown in its economy have played a key factor in the fall of the value of yuan and the consequent flight of capital from China. Economic indicators have been confirming depreciating markets in China with exports falling consecutively for the past five months and imports for thirteen straight months.

Analysts however feel that the PBOC’s strategy of selling dollars to maintain control is unsustainable at the current pace and a drastic fall is inevitable.

In a statement, Rajiv Biswas, Economist at IHS Global Insight said,

While the remaining reserves represent a substantial war chest, the rapid pace of depletion in recent months is simply unsustainable. Expectations mount that the PBOC will eventually be forced to capitulate once its reserves are sufficiently depleted.

The central bank is currently trying to reduce the gap between its onshore currency value (traded in Shanghai) and its offshore currency (traded in Hong Kong) by buying yuan in offshore markets and selling dollars onshore. Additionally, it is said to be trading in currency derivatives as a front for its transactions aimed at propping up the yuan. The bank has also put in capital controls by restricting foreign exchange transactions by individuals and corporations in China in an attempt to limit capital outflows.

Industry observers have suggested that when China’s reserves fall below the IMF’s safety line, the yuan will start to depreciate at an ever quicker pace. China is not the only country battling declining currency values and foreign reserves. Saudi Arabia is selling close to $20 billion of its assets to meet its fiscal deficit each month. India is also controlling capital outflow of foreign investors to ensure the rupee remains competitive.