JAKARTA - China’s official foreign exchange reserves has declined by USD12 billion in January 2017, following a decline of USD41 billion in December and USD69 billion in November 2016. The decline is likely to put further pressure on policy makers to further prevent draining of the FX reserves, said Rajiv Biswas, Asia Pacific Chief Economist of IHS Global Insight.
Followings are the key points:
- China’s official Foreign Exchange Reserves declined by USD12 billion in January 2017, following a decline of USD41 billion in December and USD69 billion in November 2016.
- China’s FX reserves fell to a level of USD2.998 trillion by the end of January 2017.
- Chinese FX reserves have fallen by USD992 billion from their peak of USD3.99 trillion in June 2014.
- The cumulative decline of Chinese FX reserves during the last three months amounted to USD122 billion.
Significance of the FX decline
With Chinese FX reserves having dropped below the psychologically important threshold of USD 3 trillion, this will further ramp up the pressure on Chinese policymakers to prevent the further draining of FX reserves, said Rajiv.
Chinese FX reserves have now fallen by USD 992 billion since their peak level of USD 3.99 trillion reached in June 2014. The Chinese government and the PBOC are now facing a tremendous battle to stem further significant capital outflows while also trying to maintain confidence in the yuan and prevent any significant further drop in the yuan exchange rate. Chinese authorities are likely to continue to take tough regulatory action to clamp down on capital outflows, following the wide range of steps already taken in recent months.
While the remaining USD2,998 billion of China’s FX reserves still represents a very substantial war chest, the rapid pace of depletion of FX reserves during the past year has heightened concerns amongst Chinese policymakers, triggering a series of measures in recent months to curb capital outflows, he said.
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 USD50,000 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 dollar during the course of 2016. However, with the US Fed expected to raise policy rates three more times in 2017, the US dollar 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 dollar.
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. (*)