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China’s Forex Reserves Fall by Record $93.9 Billion on Yuan Intervention
PBOC has been selling its dollar holdings to prevent the yuan from sliding further
ENLARGE
By
Lingling Wei and
Anjani Trivedi
49 COMMENTS
China’s foreign-exchange reserves plunged by a record amount in August, underscoring the strain endured by the country’s central bank as it intervened intensely to prop up the yuan.
The People’s Bank of China said Monday that its reserves fell by $93.9 billion, the biggest-ever monthly drop in dollar terms and the largest in percentage terms since May 2012. The decline in China’s foreign-currency reserves has accelerated, deepening a trend that illustrates the pressures of the country’s slowdown, rising capital outflows and expectations for monetary tightening in the U.S.
China used its reserves to stabilize the yuan after the central bank devalued the currency on Aug. 11, a move that heightened worries about growth in the world’s second-largest economy and sparked a sharp selloff across global stock markets.
At $3.56 trillion as of the end of August, the currency reserves held by the PBOC still account for nearly one-third of all holdings by central banks world-wide. But the reserves have declined since a peak of nearly $4 trillion in June 2014 as more money leaves the country
“It’s a new normal,” said Larry Hu, an economist at Macquarie Group Ltd., a Sydney-based investment bank.
The reversal raises some concerns in the U.S. government-bond market because about 40% of China’s foreign-exchange reserves are held as Treasurys, according to estimates by analysts at Bank of America Merrill Lynch. As of June, China was the world’s largest investor in Treasurys, holding $1.27 trillion, according to the latest data from the Treasury Department.
Although Treasury yields remain low by historical standards, they could become elevated if selling pressure from China intensifies, some market watchers say. Bond yields rise when prices fall.
For years, companies and investors poured money into yuan assets in China, hoping to gain not only from a rapidly growing economy, but also from a currency that was set for appreciation—rising more than 30% in the past decade. Those bets have been upended both by the yuan devaluation and signs of a deepening economic slowdown.
ENLARGE
A 100 yuan banknote sits beside a $100 banknote. China?s foreign-exchange reserves fell $93.9 billion in August from July. Photo: Reuters
China on Monday revised its 2014 growth rate to 7.3% from 7.4% due to a weaker-than-reported contribution from the service sector, a relatively small change but one that suggests that China’s effort to meet its official growth target of about 7.5% last year was tougher than it seemed.
The declines in China’s reserves contributed to a drop in central-bank holdings world-wide in the first quarter of this year to $11.43 trillion, according to the International Monetary Fund, from a peak of $11.98 trillion in mid-2014.
In a report issued last week, analysts at Deutsche Bank AG likened the fall in global reserves to “quantitative tightening,” saying shrinking reserves could result in higher bond yields, drive up market borrowing costs and challenge the ability of some central banks to exit from easy-money policies. The Federal Reserve is poised to raise interest rates in the coming months, which has spurred the dollar to strengthen against many emerging-market currencies.
The reserves decline represents “an additional source of uncertainty in the global economy,” the bank’s analysts wrote.
China’s capital outflows over the past three to four quarters “are unprecedented,” said Nikolaos Panigirtzoglou, global market strategist at J.P. Morgan in London. “There could potentially be even more over the coming year, as the market tries to gauge the extent of the devaluation of the Chinese currency.”
However, he said a fall in China’s reserves shouldn’t necessarily affect U.S. interest rates as money leaving China “doesn’t disappear.” As companies sell their yuan, they typically put their dollars in a bank, and the banks often buy U.S. government bonds with the money, Mr. Panigirtzoglou said. The strengthening dollar has also drawn more investors into Treasurys.
Some analysts say sales by China could be why Treasury prices haven’t shot up even though share prices have tumbled. Between Aug. 20 and 24, the S&P 500 fell 9%, but the yields on the benchmark 10-year Treasury fell 0.13 percentage point, a modest move given the broad market tumult.
On Friday, the 10-year yield was 2.128%, well above lows hit in February.
The relatively tame decline in Treasury yields “is likely linked to the sales of Treasury securities by the PBOC,” David Woo, the head of global interest rates and currencies research at Bank of America Merrill Lynch, wrote in a report last week.
Also supporting Treasurys are purchases by bond funds, as investors have flocked to haven investments during the recent market volatility.
Another reason China’s reserves have fallen is a push by Chinese companies and foreign companies operating in China to pay down dollar debt. China’s reserves, which include a basket of global currencies and other assets, have also lost an estimated $20 billion on the changing value of currencies, with the euro, for instance, rising 2.3% in August against the dollar.
Emerging-market countries, especially in Asia, rapidly accumulated foreign reserves in a bid to protect their economies from volatile capital flows after the 1990s, outpacing most industrialized countries. In smaller economies like Thailand, reserves account for a little over 40% of gross domestic product. China is the largest holder globally, with reserves that account for about 35% of its GDP.
That ratio has been falling over the past years, but by some measures, China’s reserves give it a sufficient cushion. It has sufficient reserves to pay for 22 months of imports.
Still, investors say as China turns away from an export-oriented economy to one led by consumption, its foreign-exchange reserves are bound to come under further pressure.
“Capital outflow is a big concern,” said an official close to the central bank. That is despite the fact that Beijing still has a big war chest to defend the yuan.
More
Monday’s data “on China’s foreign-exchange reserves suggest that the People’s Bank is not burning through its reserves as quickly as many had believed,” said Julian Evans-Prichard, China economist at Capital Economics.
He calculates that around $130 billion worth of funds were moved out of China in August, up from his estimate of $75 billion in outflows in July.
The central bank has resorted to two strategies to try to stem the yuan from falling further, according to people familiar with the matter. First, before the opening of daily trading, the central bank has been providing state-owned banks, which report yuan price levels to the central bank, with “window guidance” on a yuan price that meets the comfort levels of the PBOC.
Secondly, the central bank has been directly intervening in the currency market by buying the yuan and selling dollars to prevent the yuan from falling too much. Analysts from Deutsche Bank estimated that the central bank spent up to $50 billion on interventions on Aug. 12, 26 and 28.
The intervention also has had the effect of draining yuan funds out of the market—threatening to cause a shortage of funds at Chinese banks. As a result, the central bank in late August decided to release more than $100 billion in funds for banks to lend.
PBOC has been selling its dollar holdings to prevent the yuan from sliding further
By
Lingling Wei and
Anjani Trivedi
Anjani Trivedi
The Wall Street Journal
CANCEL- BiographyAnjani Trivedi
- @anjani_trivedi
- anjani.trivedi@wsj.com
49 COMMENTS
China’s foreign-exchange reserves plunged by a record amount in August, underscoring the strain endured by the country’s central bank as it intervened intensely to prop up the yuan.
The People’s Bank of China said Monday that its reserves fell by $93.9 billion, the biggest-ever monthly drop in dollar terms and the largest in percentage terms since May 2012. The decline in China’s foreign-currency reserves has accelerated, deepening a trend that illustrates the pressures of the country’s slowdown, rising capital outflows and expectations for monetary tightening in the U.S.
China used its reserves to stabilize the yuan after the central bank devalued the currency on Aug. 11, a move that heightened worries about growth in the world’s second-largest economy and sparked a sharp selloff across global stock markets.
At $3.56 trillion as of the end of August, the currency reserves held by the PBOC still account for nearly one-third of all holdings by central banks world-wide. But the reserves have declined since a peak of nearly $4 trillion in June 2014 as more money leaves the country
“It’s a new normal,” said Larry Hu, an economist at Macquarie Group Ltd., a Sydney-based investment bank.
The reversal raises some concerns in the U.S. government-bond market because about 40% of China’s foreign-exchange reserves are held as Treasurys, according to estimates by analysts at Bank of America Merrill Lynch. As of June, China was the world’s largest investor in Treasurys, holding $1.27 trillion, according to the latest data from the Treasury Department.
Although Treasury yields remain low by historical standards, they could become elevated if selling pressure from China intensifies, some market watchers say. Bond yields rise when prices fall.
For years, companies and investors poured money into yuan assets in China, hoping to gain not only from a rapidly growing economy, but also from a currency that was set for appreciation—rising more than 30% in the past decade. Those bets have been upended both by the yuan devaluation and signs of a deepening economic slowdown.
A 100 yuan banknote sits beside a $100 banknote. China?s foreign-exchange reserves fell $93.9 billion in August from July. Photo: Reuters
China on Monday revised its 2014 growth rate to 7.3% from 7.4% due to a weaker-than-reported contribution from the service sector, a relatively small change but one that suggests that China’s effort to meet its official growth target of about 7.5% last year was tougher than it seemed.
The declines in China’s reserves contributed to a drop in central-bank holdings world-wide in the first quarter of this year to $11.43 trillion, according to the International Monetary Fund, from a peak of $11.98 trillion in mid-2014.
In a report issued last week, analysts at Deutsche Bank AG likened the fall in global reserves to “quantitative tightening,” saying shrinking reserves could result in higher bond yields, drive up market borrowing costs and challenge the ability of some central banks to exit from easy-money policies. The Federal Reserve is poised to raise interest rates in the coming months, which has spurred the dollar to strengthen against many emerging-market currencies.
The reserves decline represents “an additional source of uncertainty in the global economy,” the bank’s analysts wrote.
China’s capital outflows over the past three to four quarters “are unprecedented,” said Nikolaos Panigirtzoglou, global market strategist at J.P. Morgan in London. “There could potentially be even more over the coming year, as the market tries to gauge the extent of the devaluation of the Chinese currency.”
However, he said a fall in China’s reserves shouldn’t necessarily affect U.S. interest rates as money leaving China “doesn’t disappear.” As companies sell their yuan, they typically put their dollars in a bank, and the banks often buy U.S. government bonds with the money, Mr. Panigirtzoglou said. The strengthening dollar has also drawn more investors into Treasurys.
Some analysts say sales by China could be why Treasury prices haven’t shot up even though share prices have tumbled. Between Aug. 20 and 24, the S&P 500 fell 9%, but the yields on the benchmark 10-year Treasury fell 0.13 percentage point, a modest move given the broad market tumult.
On Friday, the 10-year yield was 2.128%, well above lows hit in February.
The relatively tame decline in Treasury yields “is likely linked to the sales of Treasury securities by the PBOC,” David Woo, the head of global interest rates and currencies research at Bank of America Merrill Lynch, wrote in a report last week.
Also supporting Treasurys are purchases by bond funds, as investors have flocked to haven investments during the recent market volatility.
Another reason China’s reserves have fallen is a push by Chinese companies and foreign companies operating in China to pay down dollar debt. China’s reserves, which include a basket of global currencies and other assets, have also lost an estimated $20 billion on the changing value of currencies, with the euro, for instance, rising 2.3% in August against the dollar.
Emerging-market countries, especially in Asia, rapidly accumulated foreign reserves in a bid to protect their economies from volatile capital flows after the 1990s, outpacing most industrialized countries. In smaller economies like Thailand, reserves account for a little over 40% of gross domestic product. China is the largest holder globally, with reserves that account for about 35% of its GDP.
That ratio has been falling over the past years, but by some measures, China’s reserves give it a sufficient cushion. It has sufficient reserves to pay for 22 months of imports.
Still, investors say as China turns away from an export-oriented economy to one led by consumption, its foreign-exchange reserves are bound to come under further pressure.
“Capital outflow is a big concern,” said an official close to the central bank. That is despite the fact that Beijing still has a big war chest to defend the yuan.
More
- Heard on the Street: China Bleeds Foreign Exchange Reserves
- China’s Shift Away From Industry Drains Life From a Steel Town
- China Plan Calls for Mergers, Public Listings
- China Cuts 2014 Economic Growth Estimate to 7.3% From 7.4%
- China Boosts Efforts to Keep Money at Home
- Chinese Financial Institutions Reduced Holdings in Foreign-Exchange Funds in July
- PBOC Injection Shows China Worries About Outflows
- Markets Test China’s Vow to Ease Grip on Yuan
Monday’s data “on China’s foreign-exchange reserves suggest that the People’s Bank is not burning through its reserves as quickly as many had believed,” said Julian Evans-Prichard, China economist at Capital Economics.
He calculates that around $130 billion worth of funds were moved out of China in August, up from his estimate of $75 billion in outflows in July.
The central bank has resorted to two strategies to try to stem the yuan from falling further, according to people familiar with the matter. First, before the opening of daily trading, the central bank has been providing state-owned banks, which report yuan price levels to the central bank, with “window guidance” on a yuan price that meets the comfort levels of the PBOC.
Secondly, the central bank has been directly intervening in the currency market by buying the yuan and selling dollars to prevent the yuan from falling too much. Analysts from Deutsche Bank estimated that the central bank spent up to $50 billion on interventions on Aug. 12, 26 and 28.
The intervention also has had the effect of draining yuan funds out of the market—threatening to cause a shortage of funds at Chinese banks. As a result, the central bank in late August decided to release more than $100 billion in funds for banks to lend.
