China’s foreign exchange reserves fell by US$41 billion to US$3.011 trillion in December, a decline that was less than expected but still edged the reserves closer to a drop below the US$3 trillion mark that could rattle confidence in the currency.
The December figure reported by the People’s Bank of China on Saturday morning is the sixth straight monthly fall in the country’s foreign exchange reserves. The reserves declined by US$69.06 billion in November.
Beijing has repeatedly intervened to support the yuan when it weakened too sharply, using up more than US$300 billion of forex reserves in 2016 and prompting them to sell some of their massive holdings of US government bonds.
Inevitably, Beijing will continue to support the currency to prevent it breaking the 7 yuan-per-dollar level but faces challenges in stemming capital outflows and further depreciation. Banks have been asked to tighten monitoring of residents and corporations moving funds offshore.
The People’s Bank of China data show foreign reserve holdings to be slightly higher than the median estimate for US$3.010 trillion in a Bloomberg survey.
China strengthened the yuan-dollar fixed rate by 0.9% on Friday, the most since 2005, sending a strong message to all that Beijing is stepping up its fight against bearish bets on the yuan.
“PBOC’s surprise attack in the currency market is a high-stakes wager and it could prove to be short-lived,” said a bond fund portfolio manager in Hong Kong who declined to be named. “Capital flight might take a breather in coming weeks but will return with a vengeance if China fails in turning sentiment around,” said the manager who handles more than US$5 billion in investments.
Newspapers operated by the Communist Party of China have been publishing commentaries warning Chinese not to blindly exchange their savings into foreign currencies.
China’s authorities have allowed liquidity in the offshore yuan market to run dry since the beginning of December, permitting interest rates to climb steadily during the past few weeks that culminated in a stampede by traders to exit yuan short positions on Thursday and Friday.
Overnight funding expenses for the Chinese currency in the offshore market of Hong Kong surged to more than 61% on Friday, a prohibitively high interest costs for traders to put a bearish bet on the yuan and over 30-times comparable rates in the onshore market.
The interest rate for one-day borrowing in Shanghai receded to just 2.11% by the end of the first week in 2017, following a year-end climb that peaked at 2.32% on December 23.
Chinese authorities might have scored a reprieve in the currency markets by squeezing offshore yuan short sellers with prohibitive funding costs, but Beijing’s work to restore confidence in the yuan at home and abroad has only just begun.
The author, Mr Steve Wang, fails to explain why the USD 3 trillion mark is "critical" – in fact, exactly why is it a bad thing for China to lower its USD reserves?
Has the author not studied the reasons for China’s intent to de-dollarize? Russia has been an vocal advocate and front runner of de-dollarization. Why?
Why is China building CIPS (Cross-border Interbank Payment System)?
Why not just continue to use the American-controlled, Brussel-based SWIFT (Society for Worldwide Interbank Financial Telecommunications)????
The author should be able to answer such questions if he is to be a knowledgeable and responsible business / financial reporter.
All those good questions and I also have a few.
How much China actually spent on AIIB, PCEC, Africa (60 billion pledged), Latin America (250 billion pledged), Putin and Maduro (Venezuela oil loan), OBOR, etc. All I assume are in US$.
David Makinde – I do not know. I suppose the NSA is the place to go for answers to such questions. People there monitor everything – all emails, voicemails, government and corporate financial telecommunications etc around the globe.
China should reduce their foreign reserves in the US to an absolute minimum. Why have low yield US treasury bonds when their value will drop due to raising inflation as a result of Donald Trump investments program. Donald Trump will mend the fragile relations with Russia. China will become the new villain and currency/trade wars seems likely. China should use its reserves in new markets such as EurAsia and Iran. It will give export revenues and higher return on investments. China is dependent of Saudi oil imports. The CIA and other sources is uncertain what will happen within the Saudi Monarchy. The risk for major changes in Saudi Arabia seems to be elevated.
China should protect their interest for oil by investing more in the oil industry in Iran and EurAsia. China and Russia is reducing their dollar dependency by doing currency SWAP agreements with their large trading partners. China is reducing their currency risk with an increased use of SDR. Not to forget, investment in reduced Chinese poverty will increase domestic demand. China has had an impressive reduction of poverty and more funds should be allocated to eradicate poverty in China. In a currency/trade war with the US, there will be a good idea to have alternatives to SWIFT, VISA and MasterCard and to US financial services. Hope for the best, prepare for the worst case scenario.