BEIJING • China's foreign exchange reserves have shrunk to the smallest since 2012, indicating that the central bank sold dollars as the yuan's drop to a five-year low exacerbated depreciation pressures.
The world's largest currency hoard declined by US$99.5 billion (S$140 billion) in January to US$3.23 trillion, according to a People's Bank of China (PBOC) statement released yesterday.
The median forecast of economists surveyed by Bloomberg was for a figure of US$3.21 trillion. The stockpile fell by more than half a trillion US dollars last year, the first annual drop.
Policymakers fighting to hold up the weakening yuan amid slower economic growth, plunging stocks and increasing outflows have been burning through the reserves. The draw-down has continued since the central bank's surprise devaluation of the currency in August, when the stockpile tumbled US$94 billion, a monthly record at the time.
"While the remaining reserves represent a substantial war chest, the rapid pace of depletion in recent months is simply unsustainable," said Mr Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.
"Domestic private investors and global currency traders see a one-way bet against the currency. This has resulted in large-scale private capital outflows since early last year as expectations mount that the PBOC will eventually be forced to capitulate once its reserves are sufficiently depleted."
Capital outflows increased to US$158.7 billion in December, the most since September, and were US$1 trillion last year, according to estimates from Bloomberg Intelligence. That is more than seven times the amount of cash that left in 2014.
The PBOC has stepped up efforts to stem the exodus, warning speculators that they will be punished. It intervened in the Hong Kong market last month after the yuan's offshore exchange rate sank to a record 2.9 per cent discount to the onshore rate.
Apart from selling dollars, the monetary authority also gave guidance to some Chinese lenders in the city to suspend yuan lending to curb short selling, a move that contributed to the overnight interbank lending rate surging to an all-time high of 66.8 per cent on Jan 12.
The median estimate in a Bloomberg survey is for the yuan to drop to 6.76 a dollar by the end of this year, with Rabobank Group the most pessimistic with a 7.53 prediction. The currency has declined 1.24 per cent so far this year, closing at 6.5755 in Shanghai on Friday. Chinese financial markets are shut for the Chinese New Year holiday.
China's top economic planner said that the objective for this year is for an expansion in the range of 6.5 per cent to 7 per cent. The 6.9 per cent growth last year was the slowest in 25 years. Exports probably declined for the seventh straight month in January, according to the median estimate in a Bloomberg survey before data due on Feb 15. China increased its gold hoard last month, raising its holdings to 57.18 million ounces as it looks to diversify its foreign exchange stockpile.
"The smaller decline in the reserves suggests that some capital outflow restrictions imposed last month worked, " Mr Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong, wrote in a note yesterday, adding that he estimates the drop this month will be "much smaller".