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China’s Foreign Exchange Reserves Drop Below $3 Trillion

China’s foreign exchange reserves dipped below the $3 trillion level in January, the first time in six years. Although the level has no specific implications, it could influence the market sentiment on the value of yuan.

Reserves went down to $2.998 trillion in January a fall of $12.3 billion, which was however much lower than the drop in December, when it fell by $41 billion.

In a statement Julian Evans-Pritchard, a China analyst at Capital Economics, said,

The US$3 trillion threshold is more of a psychological thing. The capital outflows were largely eased given that yuan appreciation last month created a sign of two-way fluctuations and control measures were implemented strictly.


There are however concerns that reserves are declining despite the wide array of restrictions on foreign exchange transactions imposed by the Chinese authorities. It cements worries in the global markets that China is running through its reserves in abid to halt the deterioration in the value of yuan and to control capital outflows. The yuan fell by over 6 percent against the dollar in 2016, the sharpest drop sustained by it since 1994. Some industry analysts are speculating that China may devalue the yuan, given the drain on its reserves.

China’s foreign exchange regulator, the State Administration of Foreign Exchange issued an explanatory statement stating that the drop in reserves was primarily due to seasonal factors. It pointed out that the outflow had levelled out in recent months and it will be balanced in the future. It also highlighted the fact that the current amount of reserves was adequate for the needs of the country.

The situation could also ease further in the coming months considering that the strengthening of the dollar has dropped off as a result of the recent protectionist actions by U.S. President Donald Trump. The US Dollar Index went down by around 2.7 percent last month. Xie Yaxuan, a macro analyst at China Merchants Securities further noted that domestic factors such as the opening up of the bond market and the slowing down of outflows would help improve the situation in 2017.

However if the U.S. Federal Reserve decides to hike the interest rate, the capital outflows from China could intensify and increase the downward pressure on the yuan. Louis Kuijs, head of Asia economics at Oxford Economics stated that it might be possible that China might eventually decides to take up stronger measures to control its forex reserves levels.

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