Date
20 September 2017
China's foreign currency reserves have fallen to the lowest level in nearly six years even as authorities have tried to curb capital outflows. Photo: Bloomberg
China's foreign currency reserves have fallen to the lowest level in nearly six years even as authorities have tried to curb capital outflows. Photo: Bloomberg

China forex reserves drop to near six-year low

China’s foreign currency reserves dropped below the US$3 trillion level for the first time in nearly six years, data showed Tuesday, highlighting the challenges faced by Beijing in curbing capital outflows.

According to figures released by the People’s Bank of China (PBoC), the nation’s forex stockpile fell US$12.31 billion last month to US$2.998 trillion.

The drop was larger than expected, complicating the central bank’s balancing act of trying to contain asset bubbles without triggering a liquidity crunch, the Wall Street Journal reports.

China’s forex regulator played down significance of the reserves falling below the US$3 trillion mark, insisting that the reserves remain ample and that they will continue providing support to the yuan.

However, the Journal noted that the continued outflows are challenging the PBoC’s ability to juggle its conflicting goals of curbing bubbles and supporting growth.

The central bank needs to tighten market liquidity to prevent excessive borrowing. But on the other hand, money leaving China means banks have less cash to lend out, leading them to call for the central bank to pump in more liquidity.

In recent days, the PBOC has adopted a strategy of raising short-term borrowing costs for financial institutions to reduce the froth in the financial markets while leaving unchanged the benchmark policy rates.

At the same time, it has refrained from reducing the amount of money lenders must hold in reserve at the central bank, for fear that doing so could further pressure the yuan and worsen asset bubbles.

But with the outflows already draining money from the country, the stricter monetary bias risks causing a cash crunch, economists and analysts warn.

“China’s economic growth is not yet strong enough to warrant a monetary policy shift towards tightening,” Chi Lo, China economist at BNP Paribas Investment Partners, was quoted as saying.

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RC

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