China's foreign reserves fall to 6-year low after outflows

AP News
Posted: Feb 07, 2017 5:40 AM

BEIJING (AP) — China's foreign exchange reserves have fallen to a six-year low following outflows of capital that prompted Beijing to tighten controls on outbound investment.

Reserves declined by about $13 billion in January to $2.99 trillion but still are by far the world's biggest, central bank data showed Tuesday. The reserves have fallen by $992 billion from a peak of $3.99 trillion in June 2014.

The People's Bank of China is spending the reserves to shore up the exchange rate of China's yuan after expectations it would decline led companies and small investors to move money out of the country.

That prompted Beijing to step up scrutiny of proposed foreign investments and ban some activities by individual investors.

"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," said Rajiv Biswas of IHS Global Insight in a report.

U.S. President Donald Trump promised during his campaign to declare Beijing a currency manipulator, accusing it of depressing the yuan's exchange rate to give Chinese exporters an unfair price advantage. Economists say that while that might have been true during the previous decade, market forces now are pushing the yuan lower and it would fall further if Beijing weren't intervening to prop it up.

The People's Bank bases the yuan's state-set exchange rate on a basket of currencies that is believed to be dominated by the dollar. That required Beijing to intervene to keep the yuan in line with the dollar as the greenback rose over the past two years.

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The latest data suggest the capital outflow might be slowing but the change is modest, economists said.

The data suggest capital outflows last month were about $45 billion, down from December's $61 billion, according to Julian Evans-Pritchard of Capital Economics.

"Outflows may start to pick-up again later this year if, as we expect, the U.S. dollar begins to strengthen again," Evans-Pritchard said in a report. "But for now at least, the jitters surrounding capital outflows late last year have subsided."