China may find it difficult to continue buying yuan, Japan's finance minister Aso warns

Japanese Finance Minister Taro Aso.
Japanese Finance Minister Taro Aso. PHOTO: BLOOMBERG

TOKYO (REUTERS) - Japanese Finance Minister Taro Aso said on Friday (Jan 8) that China may find it difficult to continue supporting the yuan given the record decline in its foreign currency reserves - a warning that China may have to let its currency fall even more.

Further declines could send shockwaves around the world as they could trigger further capital flight from China and potentially set off competitive currency devaluations in other countries, some economists have said.

"Foreign exchange reserves have already fallen this much due to China's purchases of yuan to support its own currency, so it could be difficult to continue," Mr Aso said.

China's stock markets have also been in free fall since the start of the year, raising concern Chinese authorities are losing grip of the decelerating economy.

China has recently accelerated the depreciation of the yuan, which some economists take as an indication that Beijing realises it cannot continue to burn through its currency reserves.

China's foreign exchange reserves, the world's largest, posted their biggest annual drop on record in 2015, data showed on Thursday.

Foreign exchange reserves fell US$512.66 billion in 2015 to US$3.33 trillion, central bank data showed.

They dropped US$107.9 billion in December alone, the biggest monthly decline on record and more than markets had expected. Economists polled by Reuters had expected reserves to end the year at US$3.40 trillion.

Mr Aso also expressed concern about the disparity between the onshore and offshore rates of the yuan caused by China's frequent currency intervention.

Chinese officials are also struggling to energise the slowing economy, which has been weakening due to an unwinding of years of excess credit.