China’s Forex Reserves Fall Below $3 Trillion in January

(Beijing) — China’s foreign exchange reserves broke the psychological “comfort level” of $3 trillion in January for the first time in nearly six years, official data showed Tuesday, but the decrease slowed sharply on a weakened U.S. dollar and Beijing’s measures to stem capital flight.

The country’s stockpile of foreign currency dropped for the seventh straight month in January to $2.9982 trillion from $3.0105 trillion in the previous month, data published by the People’s Bank of China (PBOC) showed.

The last time it fell below $3 trillion was in February 2011, when it hit $2.9914 trillion. The January figure also surprised the market on the downside as economists’ estimates ranged from $2.95 trillion to $3.03 trillion, according to Bloomberg News.

But last month’s loss of $12.3 billion narrowed significantly from a reduction of $41.1 billion in December, according to central bank figures.

The slowdown came after authorities stepped up efforts to contain capital outflows in recent months, including tightening restrictions on Chinese companies’ investment overseas, requiring banks to strengthen scrutiny of individuals’ requests for foreign currency, and increasing the cost of borrowing yuan in the offshore market to clamp down on short selling of the Chinese currency.

Louis Kuijs, an economist with research firm Oxford Economics in Hong Kong, said that the government will likely take more aggressive measures this year to reduce capital flight to limit the decline in foreign exchange reserves as outflow pressures “remain high” and existing policies “may not be enough.”

Policymakers “may eventually resort to much more forceful steps such as formally re-imposing restrictions on outflows or reintroducing rules on the sale of U.S. dollar receipts by exporters on the domestic FX market,” he told Caixin.

The smaller decrease in foreign exchange reserves was also helped by the weakening of the dollar against the euro and the yen in January, which was estimated to have led to a $30 billion gain in the stockpile from a valuation perspective, said Zhou Hao, a Singapore-based analyst with Commerzbank AG, in a note.

He assumes that approximately 67% of China’s foreign exchange reserves are in dollars, 20% are in euros, and 10% are in yen.

Investors are concerned about how the Chinese government manages the yuan as it tackles massive capital outflows, which has sent jitters across the global markets.

The PBOC has since 2015 been adopting a policy to allow the yuan to weaken against a globally strong dollar while intervening in the meantime to prevent too fast a depreciation that would trigger more outflows. It has spent $778 billion over the past two years to control the pace of yuan devaluation against the greenback, Kuijs said.

Net financial capital outflows will eventually have to come down to a level of about $450 billion on an annual basis, from an estimated $596 billion in 2016, to “achieve stable FX reserves,” he said.

Although there is little fundamental basis for the market to be obsessed with the $3 trillion mark, he agrees with a suggestion by the International Monetary Fund that an adequate minimum level for China’s foreign exchange reserves is $1.7 trillion as long as Beijing maintains its capital account restrictions.

Contact reporter Fran Wang (fangwang@caixin.com)