Declining Trend in China’s Forex Reserves Continues In September

Peoples Bank of ChinaFor the 3rd straight month in September, the Foreign Exchange reserves of China have dipped low. This decline was more than the excepted level and it has created a cause of concern among the industry analysts. This sharp fall is attributed to the fact that the Central Bank of China is continuing its efforts to sell dollar in order to prop up the declining Yuan.

As per the latest report, the reserves of this country dropped to US$3.166 trillion from US$3.185 trillion in a matter of just one month. This decline of US$18.8 billion is more than as compared to the figures in the month of August which was US$15.89 billion. This decrease in reserves clearly indicates that People’s Bank of China (PBOC) is continuing the policy of selling dollars in order to stem the drop in Yuan by making certain changes in its currency policies and it includes the pursuit to internationalise the currency of China.

The chief China economist of Nomura Holding Inc Zhao Yang commented that the drop in the reserves is because of the intervention by capital outflow and PBOC. Louis Kuijs who is the head of Asia Economics at Oxford Economics agrees with the views put forth by Yang and he exclaims that market factors also have a prominent role in the drop in reserves.

Financial Times

Louis Kuijs has made the following statement:

Over the past nine months, the market has become more bearish on China’s currency, and the authorities have allowed that market pressure to drive the currency weaker. But they are keen to manage this process. Therefore, at times they use reserves to smooth out the weakness of currency. And it looks like it has continued into September.

He has further added that PBOC had to intervene in the matter because the authorities of China were keen to make sure outflows do not become unmanageable. This, in turn, can weaken the currency and people of this country might have to move their assets outside. Yuan which is the main currency of China has declined against the dollar to its lowest mark since the beginning of this year 2016 in spite of stringent efforts implemented by PBOC.

Central Bank of China intervened in this matter last ahead of the Group of 20 meetings and the inclusion of Yuan in International Monetary Fund’s Special Drawing Rights set of currencies. China Citic Bank International’s Chief Economist Liao Qun believes that the strength of this currency will depend on the stability of the economy of China.

There is a lot of pressure on the capital flow because of the slowdown in the economy of China. This has resulted into the clamping down on capital transfers by authorities from China with different kinds of restrictive measures.

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