FX Reserves Drop to Five-Year Lows
As hordes of cash continue to leave China’s shores, the People’s Bank of China (PBOC) has allowed its foreign currency reserves to dwindle to levels not seen since 2011. The PBOC’s reserves declined another US$46.0 billion to US$3.12 trillion in October. (Source: “China’s Foreign-Exchange Reserves Drop to Lowest Since 2011,” Bloomberg, November 7, 2016.)
Economists had only predicted a net loss of US$34.0 billion, which undoubtedly sharpened the impact of such a steep fall. It was the biggest one-month drop since January, not to mention nearly triple the US$19.0-billion decline which took place in September.
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As a result of this year’s continued FX bleeding, the total amount of reserves are now at a five-year low.
This story of capital outflows leading to a shortfall in PBOC currency reserves is corroborated by the yuan’s crumbling value. It fell another 1.53% through October, suggesting that many Chinese people are eager to swap their money out of the currency.
In fact, so many people in China were desperate for exit routes that they started using “Bitcoin” to ferry their cash overseas. The cryptocurrency offered a relatively safe and secure means of skirting the capital controls which monitor traditional outflow from China. As recently as 2013, the Chinese government wrongly classified Bitcoin as a commodity, meaning its regulation was outside the PBOC’s purview.
However, that situation is fast-changing.
Recent reports show that Chinese regulators have finally caught on to the scheme, and are considering restrictions on Bitcoin exchanges located within China. They may limit the amount of Bitcoin which can be transferred beyond the country’s borders, or else ban it altogether.
Analysts say the rapid and uncontrolled devaluation of the yuan is sparking fears of unknowable reactions. For instance, if the PBOC decides to rearrange its portfolio for risk-management purposes, its effects could ricochet around markets through the near- to medium-term.
The yuan’s drop during the last month was its biggest one-month drop since the country’s epic devaluation in August last year. Investor sentiment had taken a serious blow at the time because many suspected that PBOC policymakers were pumping up the exchange rate ahead of a G20 meeting and the yuan’s official entry into the IMF reserve currency basket.
