Rajiv Biswas, Asia Pacific Chief Economist, IHS Global Insight
- China’s official Foreign Exchange Reserves declined by US$41 billion in December 2016, following a decline of US$69 billion in November 2016.
- China’s FX reserves fell to a level of US$3.011 trillion by the end of December 2016.
- Chinese FX reserves have fallen by US$982 billion from their peak of US$3.99 trillion in June 2014.
- The cumulative decline of Chinese FX reserves during just the last two months of November and December 2016 amounted to US$110 billion.
China’s Foreign Exchange Reserves fell by US$41 billion in December 2016, pulling down total FX reserves to a level of US$3.011 trillion, according to FX reserves data released by the People’s Bank of China. The US$41 billion decline in China’s FX reserves in December is continuing to put pressure on the PBOC, as its FX reserves have depleted to the brink of the US$3 trillion mark by the end of December 2016. China’s FX reserves have now declined by US$982 billion since their peak in June 2014.
The significant further decline in China’s FX reserves by a total of US$110 billion over the last two months of 2016 reflects a number of factors, with the appreciating US$ having had a significant negative impact on the value of other major reserve currencies such as the euro and yen when measured in USD terms in China’s overall FX reserves. Rising yields on US Treasuries in November and December have also resulted in falling prices of US Treasuries, hitting the overall US$ value of China’s vast holdings of US Treasuries in its FX reserves, which are estimated to exceed US$1 trillion.
While the remaining US$3.011 trillion of China’s FX reserves still represents a very substantial war chest, the rapid pace of depletion of FX reserves during 2016 has heightened concerns amongst Chinese policymakers, triggering a series of measures in recent months to curb capital outflows. This has included measures to increase official scrutiny of large M&A deals that would involve substantial capital outflows, as well as greater scrutiny of smaller foreign exchange transfers abroad by individuals, even though the US$50,000 annual limit for foreign exchange conversion by individuals remains in place.
According to new regulations issued by China’s State Administration of Foreign Exchange (SAFE) on 31 December 2016, Chinese citizens’ foreign currency purchases are limited to current account transactions, which includes tourism, overseas study, business purposes, family visits, hospital, goods trade, non-investment insurance, and consulting services. SAFE also explicitly stipulated that individuals are no longer allowed to purchase foreign currency for the purpose of capital investment, such as the purchase of real estate abroad, insurance policies with investment returns, and securities. These new rules reflect efforts by the Chinese government to try to curb large-scale capital outflows in recent years, particularly related to Chinese citizens purchasing properties abroad in countries such as the US, Canada, UK, Australia, Malaysia and Dubai.
The PBOC is also attempting to stabilize the yuan, which, along with many other global currencies, has fallen against the US$ during the course of 2016. The threat of being named by the US as a currency manipulator has increased the pressure on the PBOC to try to stabilize the yuan’s decline against the US$. However, with the US Fed expected to raise policy rates three more times in 2017, the USD is expected to appreciate against many Asian currencies in 2017, with domestic private investors as well as global currency traders and hedge funds continuing to expect the yuan to fall further against the US$. This has resulted in continuing private capital outflows out of the yuan during 2015 and 2016, with further capital outflows likely to continue in 2017. The PBOC is caught between the devil and the deep blue sea, facing a choice of either continued slow erosion of FX reserves, or further currency adjustment that could be destabilizing for China and may also cause turmoil in Asian currency markets.