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November 8, 2016

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Forex reserves fall for 4th month

CHINA’S foreign exchange reserves shrank for a fourth straight month in October, the central bank said yesterday.

The world’s largest currency hoard fell to US$3.12 trillion last month, down US$45.7 billion from September, marking the lowest level since March 2011, according to data from the People’s Bank of China.

The result comes as China sold US dollars to defend the yuan against depreciation caused by capital outflows.

However, the fall was milder than expected, which showed that the central bank didn’t use too many reserves to bolster the yuan, said Larry Hu, head of China economics at Macquaire Securities.

It shows that the PBOC is more tolerant of the yuan’s fluctuations than people think, Hu said.

The yuan has depreciated over 4 percent against the US dollar since the start of the year, due to growing expectations of an interest rate hike by the US Federal Reserve.

“The pressure on the yuan remains big as we approach the US rate-hike window in December,” analysts at Haitong Securities said in a note.

China’s weakening currency is a key concern for more than half of the country’s wealthy elite, with 60 percent of them planning to buy property overseas in the next three years as a hedge against yuan depreciation, according to Hurun report, a monthly magazine best known for its “China Rich List.”

However, experts believe that the sharp and persistent depreciation of the yuan is unwarranted, because it is not supported by underlying fundamentals.

Despite the difficulties in transitioning successfully to a consumption and innovation-driven economy, China’s GDP grew 6.7 percent in the third quarter, holding steady with the second quarter and outpacing many major economies.

Growing expectations that the Fed will raise interest rates in December boosted the dollar by about 3 percent versus major currencies in October, reducing their value in China’s reserves.

China’s gold reserves rose to 59.24 million ounces in October, equivalent to US$75.35 billion, according to PBOC’s data.

Persistent capital outflows could raise pressure on the PBOC to cut banks’ reserve requirement ratio, but analysts believe the central bank is trying to use other policy tools, such as the medium-term lending facility and standing lending facility, to inject cash into the banking system.

China has been trying to stem the flow of capital abroad with a string of measures aimed at closing loopholes and clamping down on illegal transfers.

The country’s forex reserves fell by a record US$513 billion last year.


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