China’s forex reserves drop by record $108bn in December

China’s foreign exchange reserves fell by the most on record in December, a sign of accelerating capital outflows and spending by the central bank to boost the Renminbi.

Reserves fell $108bn in past month to $3.33tn, according to central bank figures released on Thursday, bigger than the $87bn slide in November. Reserves peaked at $3.99tn in June 2014, but have fallen for 13 of the past 15 months.

The latest decline raises fresh doubts about the People’s Bank of China’s ability to continue supporting the renminbi exchange rate by selling dollars from its reserves. Analysts say that, at current levels, China’s reserves are sufficient to respond to a genuine crisis but that authorities have limited space to continue drawing down reserves to prevent renminbi depreciation.

Foreign exchange traders said on Tuesday that they saw signs the PBoC was active in the market after the renminbi fell 0.6 per cent the previous day. But heavy depreciation resumed on Wednesday and Thursday, perhaps signalling that the central bank is becoming wary of spending too heavily on intervention.

Correcting for the impact of currency fluctuations on the marked-to-market value of China’s reserves, as well as inflows from trade and foreign direct investment Royal Bank of Scotland estimates that gross outflows in December were $190bn.

Given that depreciation expectations are now entrenched, analysts say further intervention would slow down, but not reverse, the weakening trend. Such spending could be wasted if it only delays the inevitable, they say.

In a statement on its website on Thursday, the PBoC noted that while the renminbi has fallen against the dollar, it has appreciated during the past year against a broader basket of currencies. Analysts say that this is a sign the central bank is prepared to tolerate further depreciation against the dollar, which would imply less deployment of reserves for intervention.

A pullback from intervention would allow capital outflow to run its course without draining reserves. But that would be likely entail a larger weakening of the renminbi than China’s stability-obsessed leadership has traditionally been comfortable with. It would also risk irritating the US and other trading partners who continue to insist that the renminbi is undervalued.

A slowing domestic economy, a string of interest rate cuts by the PBoC, and the Federal Reserve’s rate increase are all contributing the flow of investment funds out of China. Inflows from trade remain strong, however, buffering the impact of investment-linked outflows.