China’s forex reserve decline in November surpasses expectations

The median expectation according to a survey by Bloomberg was that China’s FX reserve would decline by 1.9 percent in November; instead, it declined by 2.2 percent or 469.1 billion, the biggest monthly outflow since January, when reserves declined by 3 percent or almost $100 billion. The fifth consecutive month fall despite a positive and large current account surplus and weakness in the yuan show that the outflow of money problem is quite acute for China and is troublesome for policymakers at People’s Bank of China (PBoC), who has been trying to upgrade the status of the yuan as a well-accepted reserve currency. The yuan is already included in International Monetary Fund’s (IMF) SDR basket but the usage of the currency has declined to the lowest level in years.

Though yuan remains as one of the top performing emerging market currencies, it is in for its worst year in more than a decade with more than 6 percent YTD decline against the dollar. In recent days, Chinese authorities have stepped up their efforts in stemming the outflows from the economy by imposing restrictions and also curbed gold imports, however, the drop in FX reserve, and a drop in the value of yuan transactions suggest that further weakness in the exchange rate to be one the way. So far this year till October $530 billion has flown out of the economy.