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China Disregards Worries Over Declining Forex Reserves
World Economy

China Disregards Worries Over Declining Forex Reserves

China’s central bank governor said there was no basis for continued depreciation of the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, according to an interview published Saturday in Caixin magazine.
Zhou Xiaochuan dismissed speculation that China planned to tighten capital controls and said there was no need to worry about a short-term decline in foreign-exchange reserves, adding that the country had ample holdings for payments and to defend stability, Bloomberg reported.
The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday.
The country’s foreign-exchange reserves shrank to the smallest since 2012 in January, signaling that the central bank sold US dollars as the yuan fell to a five-year low.
The weakening exchange rate and declining share markets in China have fuelled global turmoil and helped send world stocks to their lowest level in more than two years.
The bank will not let “speculative forces dominate market sentiment,” Zhou said, adding that a flexible exchange rate should help efforts to combat speculation by effectively using “our ammunition while minimizing costs.”
Policy makers seeking to support the yuan amid slower growth and increasing outflows have been using up reserves. The draw-down has continued since the devaluation of the currency in August and holdings fell by $99.5 billion in January to $3.23 trillion, according to the central bank on February 7. The stockpile slumped by more than half a trillion dollars in 2015.
China has no incentive to depreciate the currency to boost net exports and there’s no direct link between the nation’s gross domestic product and its exchange rate, Zhou said.

 

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