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Chinese FX Reserves Expected to Fall to Lowest Level Since 2012

Chinese FX Reserves Expected to Fall to Lowest Level Since 2012

Talking Points:

  • January Chinese foreign reserves expectedto drop to $3210.0 billion, lowest since 2012
  • The People’s Bank of China has been fighting Yuan depreciation for months
  • Increased volatility from the Yuan exchange rate could bode ill for public officials

Find key turning points for the USD/CNH with DailyFX SSI

In December, Chinese foreign reserves declined 3.1 percent bringing the total amount to $3330.36 billion. This is the lowest amount of FX reserves held by China since December 2012. That is also the biggest percentage drop since December 2003. Economists are expecting the world’s second largest economy to reduce its foreign reserves even further to $3210.0 billion in January 2016 and further accelerating the pace of outflows. The data is due to be released Monday morning (February 7th) in China.

Currently, the US Dollar is the primary reserve currency in the international market. In application, a central bank can help prop-up its currency against the greenback by spending its FX reserves. As Currency Strategist Ilya Spivak mentioned, the People’s Bank of China has been fighting various financial pressures including Yuan depreciation by spending its FX reserves since mid-2014. Reflecting the funding effort, foreign reserves have continued to deplete, with January expected to be the largest decrease since 2003.

Back in August, the PBOC changed the way it sets the Yuan-Dollar exchange rate. At the same time, the new fixing rate policy appeared to amplify capital flight. Chinese officials have attempted to curb the repatriation to avoid the appearance of concern. Using reserves to soften the blow of capital outflows is not an uncommon monetary measure for emerging markets, however, China’s influence as the world’s second largest economy magnifies the influence.

As can be seen on the chart below, the velocity of FX reserve spending has increased. The most recent report showed that foreign reserve spending sped up at its fastest level since 2003. China does have a large amount of FX reserves, but the dry powder is not limitless. The country will need funds for normal market operations as well as a variety of financial uncertainties that could trouble the actively balanced financial system.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.