China’s Forex Reserves Dropped $99.5 Billion in January

The People’s Bank of China (PBOC) said on Sunday that China’s foreign currency reserves were $3.23 trillion in January, dropping $99.5 billion from the previous month. The numbers are said to be smaller than expected, since China has been making efforts to protect its currency while fighting against capital flight, and formerly the prevailing view from analysts was a drop of over $100 billion in forex reserves.

The current forex reserves are at the lowest level since May 2012. In December 2015, China’s forex reserves fell $107.9 billion, the largest monthly fall in history.

Yungui Wang, an official from the State Administration of Foreign Exchange of China, responded in an interview that the fluctuation in forex reserves is a normal phenomenon considering the reform China is undergoing, the unstable Balance of Payments and the volatility in domestic and international financial markets.

However, investors are worrying about the sustainability of the Central Bank’s efforts to deplete the reserves and stabilize the Chinese yuan.  In August 2015, PBOC unexpectedly devalued the yuan by nearly 2% which caused panic selling of the currency. The reaction forced the central bank to take emergency moves such as ordering state banks to buy yuan at certain rates. Nonetheless, yuan depreciated a record 2.7% in August. In early-January this year, the PBOC allowed the biggest fall in the currency since August, raising fears again in Chinese economy and global markets.

China has experienced more than $1 trillion estimated capital outflow in 2015 with the depreciated currency and depressed stock market. “The worst fears of cascading capital flight have not come to pass”, Tom Orlik, a Bloomberg Intelligence economist, commented on the less-than-expected drop in forex reserves on Sunday. “Bloomberg Intelligence Economics’ base case remains that the People’s Bank of China will keep a close hold of the yuan through this period of selling pressure.”

The US dollar to Chinese yuan exchange rate converts at 1 USD is 6.573 CNY as of this writing.

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