Wednesday, June 8, 2016

China’s Forex Reserves Hit Lowest Level in 5 Years

China�s Forex Reserves Hit Lowest Level in 5 Years.

The People's Bank of China (PBOC)[1] said Tuesday that the country's forex reserves dropped from $3.47 trillion to $3.19 trillion in May, marking its lowest level since December 2011. The drop was primarily driven by a stronger dollar and infrequent intervention from the authorities. The figure was in line with economists' expectations of $3.2 trillion reserves in May. China's forex reserves have continuously fallen from their peak of $4 trillion in mid-2014, a drop of around 20%.

Li Wei, a China and Asia economist at the Commonwealth Bank of Australia in Sydney, said, "Depreciation expectations faded and the central bank didn't burn its reserves to intervene in the foreign exchange market." Li added, "The drop was largely due to the valuation effect of a strong dollar, which leads to the depreciation of other currencies."

Less Central Bank Intervention

Even though the yuan is weak against the dollar, the PBOC has decided not to intervene much in the currency market, implying that the central bank does not want to deplete cash to support the yuan. Forex reserves have declined as the PBOC's holdings in the yen and euro have depreciated due to a stronger dollar. It is important to note that the PBOC reports its foreign holdings in US dollars.

The U.S. dollar has been appreciating as market participants are anticipating another interest rate hike from the U.S. Federal Reserve[2]. On the other hand, China's central bank, which pegs the domestic currency against the dollar, has allowed the yuan to depreciate recently. On May 30, it pegged the currency at its lowest level in 5 years. (See also: Is China Getting Nervous About a U.S. Rate Hike?[3])

Julian Evans-Pritchard, an economist at Capital Economics Ltd., said, "It mostly reflects exchange rate fluctuations which we estimate lowered the dollar value of the portion of the reserves held in other currencies by $25 billion. Movements in the dollar are likely to continue to play a key role in driving outflow pressures." He added, "Depreciation expectations remain much more manageable."

Capital Economics estimated that the net capital outflows for May reached $32 billion, slightly up from $26 billion in the month earlier. They said, "The pick-up in outflows appears to have been driven by a weakening of the renminbi against the dollar last month." (See also: Europe Finds China Business Climate 'Increasingly Hostile'[4] .)

Concerns About Capital Outflows

The PBOC deputy governor, Yi Gang, said on Tuesday that an interest rate hike will lead to further appreciation in the dollar, direct the capital flow to the U.S. and bring weakness in the currencies of emerging market nations. He said in the statement, "Many people are concerned about capital flows. In the future, the question is what will be the pace and the intensity of Fed rate hikes."

References

  1. ^ People's Bank of China (PBOC) (www.investopedia.com)
  2. ^ U.S. Federal Reserve (www.investopedia.com)
  3. ^ Is China Getting Nervous About a U.S. Rate Hike? (www.investopedia.com)
  4. ^ Europe Finds China Business Climate 'Increasingly Hostile' (www.investopedia.com)


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