Efforts to support yuan among reasons for decline
China's foreign exchange (forex) reserves continued to fall in December 2016, declining for the sixth straight month, the government announced on Saturday.
Experts said that forex reserves will keep shrinking in 2017, but there is scope for a decline as China holds sufficient reserves to balance market supply and demand.
Forex reserves stood at about $3.01 trillion last month, down $41.08 billion from the previous month, the State Administration of Foreign Exchange (SAFE) said in a statement on its website.
The People's Bank of China (PBOC)'s operations in the foreign exchange market, fluctuations in the value of the reserves' investment assets and changes in the yuan's exchange rate against the U.S. dollar all affected the level of reserves, according to the SAFE statement.
Reserves have been falling since 2014 as the central bank is stepping up efforts to stabilize the yuan's exchange rate via selling dollars, said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.
"But the underlying reason is that Chinese enterprises are eagerly seeking business in the global markets, leading to increasing demand for capital exports. Thus, the PBOC has to sell dollars from the nation's foreign exchange reserves to balance the supply and demand in the domestic foreign exchange reserve market," Dong told the Global Times on Sunday.
The Chinese government encourages domestic companies to directly invest in foreign countries and regions, but it has tightened regulation on outbound speculative investment in real estate and stocks, according to experts.
Dollar-denominated assets account for 60 percent to 70 percent of China's total foreign exchange reserves, and other foreign currency assets account for about 30 percent, according to Dong.
"China's foreign exchange reserves will keep falling in 2017 but there is enough room for the ongoing decline as the country holds the largest amount of foreign exchange reserves in the world," Dong noted. "China's $3 trillion foreign exchange reserves are about three times larger than that of Japan, which holds about $1 trillion foreign exchange reserves and ranked second in the world."
"Even if China sells about $1 trillion in the future, it would still have the world's largest foreign exchange reserves. There is strong support for Chinese companies to go out," he said.
While the remaining $3.01 trillion of China's foreign exchange reserves still represents a very substantial war chest, the rapid pace of depletion of reserves during 2016 heightened concerns among Chinese policymakers, triggering a series of measures in recent months to curb capital outflows, Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight, told the Global Times on Saturday via e-mail.
These steps included measures to increase official scrutiny of large merger and acquisition deals that would involve substantial capital outflows, as well as greater scrutiny of smaller foreign exchange transfers abroad by individuals, according to Biswas.
