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December 8, 2016

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Forex reserves drop to lowest in nearly 6 years last month

CHINA’S foreign exchange reserves fell to the lowest level since March 2011 in November, the country’s forex regulator said yesterday.

China’s reserves, the world’s largest, dropped by US$69.06 billion, or 2.2 percent, from October to US$3.05 trillion last month. It was the fifth straight monthly contraction and the largest month-on-month decline since January, the State Administration of Foreign Exchange said, citing figures from the central bank.

In an online statement, the forex regulator said the decline in November was partly because the central bank has used the reserves to maintain a balance between the supply and demand of foreign currencies in the past month.

A firmer US dollar against other currencies after the US presidential election has also dragged down China’s foreign exchange reserves, the statement said.

Since the reserves are calculated in US dollars, the weakening of other currencies held by China against the dollar would result in a decline in the country’s reserves.

Meanwhile, a retreat in bond prices has contributed to the shrinking of reserves, it added.

Accelerated economic growth in the United States, a potentially imminent interest rate hike and expectations of Donald Trump’s expansionary fiscal policies have already caused the Dollar Index to advance 6 percent in the last two months.

The yuan has weakened around 3 percent against the dollar during the period.

The yuan fell 1.6 percent versus the greenback in November alone, its worst month since August 2015, but was relatively stable against a basket of other currencies.

Some traders believe the US$3 trillion mark is a key psychological level for the People’s Bank of China, but it risks rapidly churning through its remaining stockpile if the US dollar inexorably increases.

“The central bank is making a difficult choice between the two” keeping the yuan stable or protecting its reserves, said Wang Jun, senior economist at the China Centre for International Economic Exchanges, a Beijing-based think tank.

In response to news that China will tighten regulations on outbound investments to slow capital outflows, a statement jointly released on Tuesday by the National Development and Reform Commission, the Ministry of Commerce, the central bank and the SAFE reiterated there is no change in government policies to encourage businesses to go global but they are closely monitoring the tendency of “irrational” overseas investment in some areas.

Real estate, hotels, film, entertainment and sports clubs are among the industries singled out for a tendency for irrational overseas investment, the statement said.

Regulators are also keeping an eye on risks associated with certain types of overseas activities, such as large non-core business investments and outbound investments in the form of limited partnership, and involved companies are advised to make their decisions “carefully,” the statement said.

The government will continue to support capable and qualified businesses to carry out outbound investment activities in accordance with regulations, the statement stressed.

China kept its gold reserves unchanged from October levels at 59.24 million ounces in November, equivalent to US$69.79 billion, according to central bank data.


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