World Economy

China Foreign Currency Reserves Down by $320b

The yuan is trading at its lowest level in 8 years against the dollar.The yuan is trading at its lowest level in 8 years against the dollar.

China’s foreign exchange reserves fell by $320 billion last year, Beijing announced Saturday, as authorities sought to support the yuan against a soaring dollar which is encouraging capital outflows.

The country’s vast foreign exchange reserves, the largest in the world, slipped to $3.011 trillion at the end of December, the State Administration of Foreign Exchange said on its website, AFP reported.

In December the forex reserves dropped by $41 billion from the previous month, SAFE said, which would make it their sixth consecutive monthly decline according to figures from the l People’s Bank of China.

Analysts had forecast a drop of $51 billion.

Reserves had slipped by $46 billion in October and nearly $70 billion in November, falling to levels last seen more than five years ago.

“The central bank’s efforts to stabilize the yuan are the main reason why the reserves have fallen,” last year, said the SAFE official.

  Sluggish Economy

The yuan depreciated 6.6% against the surging dollar in 2016, its biggest one-year loss since 1994, and is expected to weaken further this year if the dollar’s rally has legs.

Adding to the pressure, US president-elect Donald Trump has vowed to label China a currency manipulator on his first day in office, and has threatened to slap huge tariffs on imports of Chinese goods.

That has left Chinese eager to get money out of the country, creating what some researchers describe as a potentially destructive negative feedback loop, where fears of further yuan falls spur outflows that pile fresh pressure on the currency.

“For 2016 as a whole we estimate total capital outflows to have been around $710 billion,” Capital Economics’ China economist Chang Liu told Reuters in an email.

Capital Economics estimated net outflows in November and December alone were $76 billion and $66 billion, respectively.

The yuan is now trading at its lowest level in eight years against the dollar after dropping about 7% in the space of a year, as Beijing sells greenbacks to support its currency.

At the same time, a persistently sluggish domestic economy is encouraging a flight of funds in search of more remunerative investments abroad.

Aware of the danger, China has tightened its measures to stop the outflow of capital, in particular by restricting many investments abroad considered doubtful.

While the yuan has soared this week as China bears down on the market, a Reuters poll showed it is expected to slide at least 45 this year, largely as expectations of interest rate hikes in the United States drive the dollar higher.

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