China’s foreign exchange reserves dropped by nearly $100bn last month to the lowest level since May 2012 as Beijing continued to sell dollars to support its currency and stem capital outflows.
Fears about the slowing economy and slumping asset prices have prompted investors to shift capital out of the renminbi by buying dollar-denominated assets both at home and overseas.
The Chinese government has been battling to reduce the net outflows through a range of interventions, from supporting the currency to loosening restrictions on inbound foreign investment.
Foreign exchange reserves dropped $99.5bn to $3.23tn in January, according to central bank data released on Sunday. That was slightly lower than the monthly fall of $107.9bn in December, which was the biggest on record.
With China’s economy growing at its slowest pace since 1990, and investors worried about a possible hard landing, Beijing faces a dilemma. If it eases monetary policy to boost activity it risks undermining its recent efforts to support the currency, further undermining investor confidence.
Zhou Hao, an economist at Commerzbank, said that although the extent of the reduction in reserves was “not surprising”; it highlighted the policy challenge facing the government.
He said that while monetary policy easing was “highly needed” to boost growth, any moves to inject renminbi liquidity into the economy would probably increase the depreciation pressure on the currency.
Li Keqiang, China’s premier, met a group of foreign academics and finance experts on Friday and told them the government would pull the economy out of this predicament by deepening its reform efforts.
“I can assure you that so long as China keeps up with its reform and opening-up policy, the economy will not take a hard landing, and the Chinese currency will not depreciate greatly,” he said
Beijing wants to reshape the economy by reducing its reliance on debt-fuelled investment in construction and heavy industry and boosting consumption, the services sector and high technology industries.
But progress has been slow because of political opposition to reforming powerful state-owned enterprises, which dominate vast sections of the economy, and the market turbulence that has been buffeting China.
