China’s foreign-exchange reserves dropped for the first time in more than a decade as foreign investment moderated, signalling that the days of rampant export-led accumulation of foreign currency are numbered and that new monetary policy steps may be needed to counter capital outflows.
The People’s Bank of China published data yesterday showing a $20.6 billion (S$26.5 billion), or 0.6 per cent, fall in reserves in the final three months of the year to $3.18 trillion, though Beijing’s stash of foreign wealth is still by far the world’s largest.
China’s foreign-exchange holdings reached a record $3.27 trillion in October and then fell in the following two months, the central bank data showed, indicating a decrease of $92.6 billion in November and last month.
The quarterly drop was the first since the Asian financial crisis in the second quarter of 1998, according to data compiled by Bloomberg, a clear sign of the impact that a falling trade surplus and an outflow of speculative funds is having on China’s capital flows.
And while the quarterly fall does not signal massive capital flight from China, analysts say it does argue for Beijing to further lower the amount of cash it makes banks hold as reserves to ensure sufficient market liquidity.
China lopped 50 basis points from a record high required reserve ratio of 21.5 per cent at the end of November, the first cut in three years.
Tim Condon, chief Asia economist at ING Financial Markets, said the PBOC may lower the ratio of assets banks must hold in reserve by 2 percentage points this year. The benchmark Shanghai Composite Index fell 30.43 points, or 1.3 per cent, to 2,244.58.