Keep Calm & Carry Yuan.
Keep Calm & Carry Yuan.

At last, the moment China-watching economists like myself have been anxiously waiting for has arrived: Beijing’s massive hoard of foreign exchange reserves dipped below US$3 trillion for the first time in six years. So far, the streets around Central Hong Kong appear calm, free from crowds of economists tearing their hair out in despair.

China’s foreign currency reserves fell US$12.3 billion to US$2.9982 trillion at the end of January; economists had been expecting US$3.0035 trillion, following December’s US$41 billion plunge to US$3.0105 trillion.

The central bank data showing the seventh consecutive monthly drop was posted just a minute after 4pm, when trading had ceased in both mainland China and Hong Kong. That tells you that the release was timed very carefully so as not to rock any boats.

In the coming days, Beijing will be gauging just how well the market can stand up to the “bad news.”

Initially, the yuan traded on the weaker side in the offshore market,  falling to 6.8371 against the greenback from 6.8286 just before the announcement. The onshore rate softened to around 6.8826 to the dollar versus 6.8760.

Tuesday’s release dashed any expectations that China’s policymakers would seek to boost investor confidence by staging a defense of the psychologically important US$3 trillion level.

Officials had been reiterating their view recently that China still has the world’s largest exchange reserves despite recent persistent declines, and that there is no need to fret about the strength of the yuan. They point to the fact that the country continues to enjoy massive trade surpluses on a monthly basis.

The People’s Bank of China has also smoked out bearish bets on the Chinese currency, putting in a hard stop against a seemingly inevitable breach above 7 at the turn of the year by strengthening the offshore and onshore yuan by 2.2% and 1.2% from their lows, respectively.

Sales of foreign exchange by China’s central bank (another way of saying currency intervention) were the main reason for the decline in January, the State Administration of Foreign Exchange said on Tuesday.

Weakness in the US dollar since January helped to cushion declines in the Chinese stockpile, the forex regulator said. Overall, outflows have slowed and capital movements are becoming more balanced, it said.

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