China’s Forex Reserves Plunge to More Than Three-Year Low
The world’s largest stockpile of foreign currency fell by $99.5 billion last month
China’s foreign-exchange reserves fell to the lowest level in more than three years in January, raising questions about how long Beijing can keep burning through the rainy-day funds to defend the yuan without triggering massive capital flight.
The People’s Bank of China said Sunday that the world’s largest stockpile of foreign currency plunged by $99.5 billion last month, to $3.23 trillion. The drop follows a record $107.9 billion plunge in December and continues a decline that picked up speed in August, as China’s exchange-rate policies started to appear in flux.
In mid-August, the central bank suddenly devalued the yuan, saying it wanted to bring its value more in line with market forces. But the action backfired, as investors panic-sold the currency, forcing the Chinese central bank to dig into the reserves to stabilize it.
Last month, the central bank again had to dig deep into the reserves in the wake of a botched effort to guide the yuan weaker, a move that sparked fears of a deeper-than-expected slowdown in China’s economy, setting off a sharp selloff across global markets for stocks and commodities.
Many investors and analysts are questioning the central bank’s ability to continue such interventions. Already, the central bank is finding itself in a vicious cycle: As it repeatedly draws on the reserves to prop up the yuan, doubts grow about its ability to keep the currency stable, which then causes more money to leave the country, eroding the reserves further.
“It likely will be a long battle,” said an official at China’s central bank. The official cited the difficulties of stabilizing the currency and managing investors’ expectations as the economy slows. “But China still has sufficient reserves to withstand any external shocks,” the official said.
The notion that China has lost a measure of control over its currency is new to a country long criticized for its iron grip to ensure the yuan didn’t appreciate in a way detrimental to its exporters. Similarly, the recent plunge in China’s reserves is a contrast to years of buildup in the pile of cash as China’s economy and export sector boomed.
One question now is how much foreign currency China actually needs to have in reserve.
When the reserves peaked in mid-2014 at nearly $4 trillion, Chinese officials were concerned that the stockpile had become too big to manage efficiently. Much of China’s reserves are parked in low-yielding U.S. government bonds.
The current $3.23 trillion still gives Beijing a large war chest to meet its obligations to foreign creditors. About half of China’s external debt outstanding, which currently stands at $1.53 trillion, is yuan-denominated debt raised overseas, data from the central bank show.
But the reserves appear to be less than abundant if gauged by another measure -- the ratio of the currency reserves to M2, the broad money supply, which includes assets such as savings deposits and money-market funds as well as cash. The International Monetary Fund, the World Bank and others use the ratio to gauge the sufficiency of countries’ exchange reserves. The higher the ratio, the lower the likelihood of massive flight into other currencies.
Based on that measure, China should maintain between $2.13 trillion and $4.26 trillion worth of currency reserves to fend off any destructive capital outflow, estimates Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
“Whether China can keep adequate foreign-exchange reserves will depend on what the central bank is up to,” Mr. Zhang said. If the central bank intends to continue to intervene heavily to keep the yuan stable, he said, “the current level of reserves may not be adequate enough.”
The notion that China has lost a measure of control over its currency is new to a country long criticized for its iron grip to ensure the yuan didn’t appreciate in a way detrimental to its exporters. Similarly, the recent plunge in China’s reserves is a contrast to years of buildup in the pile of cash as China’s economy and export sector boomed.
One question now is how much foreign currency China actually needs to have in reserve.
When the reserves peaked in mid-2014 at nearly $4 trillion, Chinese officials were concerned that the stockpile had become too big to manage efficiently. Much of China’s reserves are parked in low-yielding U.S. government bonds.
The current $3.23 trillion still gives Beijing a large war chest to meet its obligations to foreign creditors. About half of China’s external debt outstanding, which currently stands at $1.53 trillion, is yuan-denominated debt raised overseas, data from the central bank show.
But the reserves appear to be less than abundant if gauged by another measure -- the ratio of the currency reserves to M2, the broad money supply, which includes assets such as savings deposits and money-market funds as well as cash. The International Monetary Fund, the World Bank and others use the ratio to gauge the sufficiency of countries’ exchange reserves. The higher the ratio, the lower the likelihood of massive flight into other currencies.
Based on that measure, China should maintain between $2.13 trillion and $4.26 trillion worth of currency reserves to fend off any destructive capital outflow, estimates Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
“Whether China can keep adequate foreign-exchange reserves will depend on what the central bank is up to,” Mr. Zhang said. If the central bank intends to continue to intervene heavily to keep the yuan stable, he said, “the current level of reserves may not be adequate enough.”