China Reserves Post First Yearly Drop Since 1992

Currency Exchange Bureaus As China Roils Markets For Second Day As Yuan Tumbles With StocksAn employee at a currency exchange store counts Chinese one-hundred yuan banknotes in Hong Kong, China. Photographer: Xaume Olleros

China’s foreign reserves shrank last year for the first time since 1992, ending a 22-year ascent that began under former top leader Deng Xiaoping and accelerated with presidents Jiang Zemin and Hu Jintao.

The currency hoard plunged by $513 billion in 2015 to $3.33 trillion as of Dec. 31, the People’s Bank of China said Thursday. It was dragged down down by factors including central bank intervention to prop up the yuan after an August devaluation roiled global markets and capital flight from the world’s second-largest economy, analysts said.

Reserves were swelled for more than two decades by foreign capital pouring in to an economy expanding at an average 10 percent clip a year and a trade surplus fueled by exporters seizing market share overseas. Now policy makers are fighting to hold up the currency amid slower growth and plunging stocks, burning through assets to reduce yuan volatility.

“The switch from reserve accumulation to decline is a major turning point in the history of Chinese development,” said Freya Beamish, a London-based economist at Lombard Street Research Ltd. “It signifies a reversal of China’s role in the U.S. Treasuries market from buyer to seller. China is still a large excess saver, but it’s now reducing those savings and the foreign-exchange reserve decline is a result of that.”

The yuan sank to a five-year low on Thursday, weakening as much as 0.6 percent to 6.5956 per dollar, as the PBOC set the reference rate at an unexpectedly weak level, a signal that it’s more tolerant of depreciation as the expansion slows.

With the slowest economic growth in a quarter century, a long-held expectation that the yuan is a one-way appreciation bet has given way to a median forecast that the currency will depreciate to 6.64 per dollar this year.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya

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