Stronger USD and foreign currency outflows weigh on China’s FX reserves in November, outflow pressure to continue

China’s foreign exchange reserves dropped by more than anticipated in November, triggering worries regarding accelerating outflows of capital and tighter foreign exchange controls from Beijing. According to a Nordea research report, outflow pressure might continue because of global uncertainties and would keep capital controls in place.

China’s official holding fell from USD 3120.7 billion to USD 3051.6 billion in November, more than market expectations. Out of the USD 69.1 billion decline, around USD 37.9 billion was because of a stronger US dollar and the rest was because of foreign currencies leaving China. The foreign exchange reserves have not been this low since March 2011.

Capital outflows from China have likely accelerated in November because of the sharp weakening of the Chinese yuan by 1.7 percent, which was in turn set off by a stronger US dollar. The USD/CNY is expected to have reached the ceiling of 6.90, so it is unlikely to break the 6.90. But there is a risk that elevated global uncertainties might keep the dollar on the strong side and the yuan on the weak side that would urge additional capital outflows.

In the long term, capital outflow pressure would continue to be there as China’s outward investment might continue to outpace the inward because China’s companies seek to expand abroad, said Nordea Bank.

China has been prompt in addressing the worries about outflows. The SAFE, in November, announced to tighten the quota on outbound investment. This move came in addition to several measures that were being introduced throughout the year, added Nordea Bank.