Drop in China’s Foreign-Exchange Reserves Cause a Decline in Currency

Market - Himanshu Gill - Nov 11,2016

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drop in china foreign exchange reserves cause a decline in currency

China’s foreign exchange reserves dropped by $45.7 billion last month, falling to its lowest level since March 2011, according to the latest data released by the People’s Bank of China.

The country’s currency reserves stood at $ 3.12 trillion after the fourth continuous decline. Increased outbound investments by Beijing and increasing capital outflows following the steady depreciation of Chinese currency yuan are considered to be the major reasons of this fall. 

China, world’s largest foreign exchange reserve, has been selling dollars to protect yuan from depreciation caused due to continuous capital outflows. The yuan has depreciated by 4% against dollar since the start of this year.

The growing expectations of a hike in interest rates by the US Federal Reserve in December has contributed towards a stronger value of dollar, whereas, yuan has reached a six year low mark.

Capital outflows are set to continue in the upcoming months with China enhancing its Overseas Direct Investment (ODI). China’s financial market has been in a chaos since the beginning of the year. Moreover, the Shanghai Stock Exchange and other markets suffered a major blow this January accompanied with a further drop in the oil prices. This situation has raised concerns regarding a sluggish economy. Experts believe that, if situations remained the same in China by the beginning of 2017, investors should expect a giant drop of $80 billion in the reserves. 

The PBoC’s intervention to meet the capital outflows is said to be limited as the major decrease was caused by the devaluation effects (nearly $30 billion). However, the US election poses a problem for the Chinese economy, particularly if the dollar strengthens further and a likely increase in the interest rate by Federal Reserve.