China’s Forex Reserves Drop for Fifth Straight Month, Most Since January, on Strong Dollar

Xu Yanyan, Song Yikang / Yicai

2016-12-08

(Yicai Global) Dec. 8 -- China's foreign exchange reserves dropped for a fifth month in a row last month, falling by the most since January, after the yuan weakened to an eight-year low.

Reserves fell USD69.1 billion to USD3.05 trillion in November, the People's Bank of China said in a statement yesterday. They fell USD99.5 billion in January.

The decline cannot be seen simply as capital flight, said Zhao Qingming, chief economist of China Financial Futures Research Center.

Forex expert Han Huishi said non-US currency devaluation probably contributed at least USD30 billion. In addition, as US, European and Japanese bond market rates rose sharply, the revaluation of the assets of the underlying investment reserve may contribute at least USD20 billion. So, the foreign exchange reserves downward pressure caused by a deficit in foreign exchange settlement and sales should be at least USD15 billion to USD20 billion.

Experts also warned on the risks of mutual reinforcement between capital outflows and the yuan's devaluation. Lian Ping, chief economist at the Bank of Communications Ltd., believes capital flows will affect foreign exchange supply and demand with a knock-on effect on the exchange rate.

"The yuan’s future trend depends on the dollar," Han said. "If the dollar continues to gain, the yuan won't necessarily be strong against it. With the dollar index challenging 105 in 2017, then there's a high probability of the yuan breaking through the CNY7."