China Slows Down Yuan Defense Using Foreign Reserves

China is still tapping into its giant cash stockpile to fend off pressure on its currency, but the pace has slowed significantly.

The country’s foreign exchange reserves shrank by about $29 billion in February to $3.2 trillion, the central bank said Monday. That decline is much less steep than the alarming drops of $99.5 billion in January and $108 billion in December.

Huge sums of money have been pouring out of China in recent months as its economy has slowed and its currency has weakened. These so-called capital outflows have put downward pressure on the yuan, and Beijing has been trying to balance that by using its foreign currency war chest to buy more yuan.

It’s a strategy many countries use, but it can deplete a central bank’s “rainy day” reserve fund. Analysts had been warning that Beijing couldn’t keep using this approach indefinitely.
The recent data, however, “suggest that capital outflows eased last month, allowing the People’s Bank of China to slow the pace of its foreign exchange sales,” said Julian Evans-Pritchard of Capital Economics.

“The PBOC still has plenty of firepower to defend the currency, and the current composition of China’s capital outflows … is more benign than the bears claim,” he said.

Analysts have estimated that hundreds of billions of dollars — perhaps as much as $1 trillion — poured out of China last year. Investor confidence hasn’t been helped by volatility in the Chinese stock market, and difficulties in the real estate sector.

via SOURCE

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza