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January 14, 2012

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Home » Business » Economy

Foreign exchange reserves take a rare fall

CHINA'S foreign exchange reserves saw their first quarterly drop in 13 years, due mainly to a withdrawal of foreign capital amid global economic uncertainties, and economists welcomed the fall and took it as a signal for monetary-easing measures.

The reserves dropped in the final quarter of last year by US$20.6 billion, or 0.6 percent, from the end of the third quarter, according to data published yesterday by the People's Bank of China. It was the first quarterly drop since the midst of Asian financial crisis in 1998.

But China's US$3.18 trillion worth of foreign reserves remained the world's largest, with 11.7 percent growth from a year earlier.

The data was released days after China's central bank Governor Zhou Xiaochuan told Xinhua news agency that a directional change of capital flow was normal as the European debt crisis has impacted China's foreign exchange market.

Economists attributed the drop to a series of factors, including withdrawal of foreign capital, speculation for depreciation of the yuan, and moderated foreign investment.

"The European debt crisis has hurt global market liquidity, and some foreign investors are withdrawing money to their home markets to pay debts by the year end," said Wang Jianhui, chief economist with Southeast Securities. "And as China's economy has improved and developed, there are not as many sectors available for foreign investment. The country's dependence on foreign investment has reduced."

Feeble economic growth in the West caused foreign direct investment in China to fall nearly 10 percent in November from a year earlier to US$8.75 billion, the first annual drop in 28 months, the latest data from the Ministry of Commerce showed.

Liu Dongliang, a senior analyst with China Merchants Bank, said that several central bank interventions with the exchange rate in December to counter market speculation for yuan depreciation consumed reserves, causing them to fall.

But economists welcomed the drop in foreign exchange reserves as they think China needs to control the risk of holding too much.

"It is time to cut the reserves. The larger foreign exchange reserves is not necessarily the better," said Liu Shangxi, a researcher with the Ministry of Finance. "Though holding foreign exchange reserves can prevent risks, too much of them can cause huge risks."

China's foreign-exchange reserves, which have been loaded heavily with US dollar assets, are prone to devaluation if the US government carries on with its easy monetary policies to boost its domestic economy, economists have pointed out.

Economists reiterated expectations that as Chinese banks' yuan funds stemming from foreign exchanges dropped, the central bank may need to cut the reserve requirement ratio to ensure sufficient market liquidity.

The yuan funds, or the amount of yuan used to purchase foreign capital when it enters China, dropped in December for the third consecutive month - by 100.3 billion yuan, central bank data showed yesterday.

That followed a 27.9 billion yuan drop in November and a 24.9 billion yuan fall in October.

"The reduction of yuan funds have significantly cut money supply," Wang of Southeast Securities said. "China's economy is slowing down and its better to lower the reserve requirements soon to stabilize growth."




 

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