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China's Foreign Reserves Drop Amid Weaker Yuan, Outflow Risks

China's Foreign Reserves Drop Amid Weaker Yuan, Outflow Risks
(Yong-hian-Lim/Dreamstime)

Monday, 07 May 2018 09:09 AM

China’s foreign-currency stockpile declined more than estimated last month as a stronger dollar weighed on holdings denominated in the euro and yen.

Reserves fell $18 billion to a five-month low of $3.12 trillion in April, the People’s Bank of China said Monday. That was below the $3.13 trillion estimate in Bloomberg’s survey of economists and down from $3.14 trillion in March.

The decline marks the second monthly shrinkage this year in the world’s biggest foreign-currency stockpile after a drop in February ended a 12-month streak of gains. The reduction signals the potential for outflow pressures as the yuan weakens, though China’s economic outlook remains solid, which may support confidence in the currency.

The reserves stockpile declined slightly due to multiple factors including weakening non-dollar currencies and falling asset prices, the State Administration of Foreign Exchange said in a statement. The currency regulator said it expects the hoard to remain stable overall.

“Reserves will remain largely balanced this year, but if the dollar continues to strengthen, capital outflow pressures will be back,” said Iris Pang, an economist at ING Groep NV in Hong Kong and one of the most accurate forecasters for the stockpile in April. The drop was due mostly to valuation effects because a stronger dollar tends to reduce the value of assets denominated in yen or the euro, she said.

The yuan weakened 0.9 percent against the dollar in April after posting its biggest quarterly gain in a decade from January to March.

What Our Economists Say:

Reserves data aren’t as much of a focus for investors as they were in 2015 and 2016, now that the yuan is back in balance and the PBOC has ceased regular market interventions, chief Asia economist Tom Orlik wrote in a  note. April’s drop likely reflects valuation effects as the euro and yen fell against the dollar, he said. “One-way pressure on the yuan might push the PBOC back into intervening in the market,” he wrote. 

Policy makers recently renewed their pledge to further open up the financial sector, taking measures that include increasing quota limits on outbound investment.

Governor Yi Gang said the PBOC hasn’t intervened in the foreign exchange market for almost a year, according to an interview with Caixin magazine dated Monday. Yi said a flexible, two-way currency mechanism is the automatic stabilizer of cross-border capital flows.

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China's foreign-currency stockpile declined more than estimated last month as the yuan weakened.Reserves fell $18 billion to $3.12 trillion in April, the People's Bank of China said Monday.
china, foreign, reserves, currency, dollar
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2018-09-07
Monday, 07 May 2018 09:09 AM
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