Chinas forex reserves fall less than expected

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China November forex reserves fall more than expected to lowest in nearly six years.

BEIJING (Reuters) - China’s foreign exchange reserves fell far more than expected in November to the lowest level in nearly six years, as authorities struggled to stem capital outflows and shore up the sliding yuan in the face of the relentlessly rising dollar.

With U. S. President-elect Donald Trump threatening to label China a currency manipulator on his first day in office, the country’s central bank is walking a tightrope, seeking to slow the yuan’s descent and tightening controls on money moving out of the country to deter capital flight.

China’s reserves fell by $69.06 billion (£54.6 billion) last month, the fifth straight month of declines and more than twice what economists had expected, central bank data showed on Wednesday.

The foreign exchange regulator made a rare comment on the reserves data soon after, explaining the reserves’ fall as a combination of the central bank’s activity and the impact of the stronger dollar, which reduced the value of other currencies held by China.

While China still has the world’s largest forex reserves, they have steadily declined over the last two years to $3.052 trillion, levels not seen since March 2011.

Some traders believe the $3 trillion mark is a key psychological level for the People’s Bank of China (PBOC), but it risks rapidly churning through its remaining stockpile if the U. S. dollar inexorably rises and it fights to steady the yuan.

“The central bank is making a difficult choice between the two (keeping the yuan stable or protecting its reserves),” said Wang Jun, senior economist at China Centre for International Economic Exchanges, a Beijing-based think-tank.

Last month’s drop in reserves was the largest since January, when a sharp fall in the yuan and worries about China’s slowing economy raised fears that Beijing could devalue its currency for a second year running, roiling global financial markets.

The central bank is widely believed to have sold U. S. dollars to support the yuan CNY=CFXS as it sunk to more than 8-1/2 year lows last month.

But the yuan’s more than 5 percent slide so far this year has sparked a flurry of bets that it will weaken further, leaving traders wondering how long China can maintain its yuan defense.

The yuan fell 1.6 percent in November alone, its worst month since August 2015 when Beijing shocked global markets by devaluing the currency by almost 2 percent overnight.

Adding to pressure on the yuan and worries about the economy, Trump has vowed to label China a currency manipulator on his first day in office on Jan. 20 and has threatened to impose huge tariffs on imports of Chinese goods.

While Trump has accused China of keeping its currency undervalued to boost exports, some analysts say the yuan has been overvalued, as evidenced by its 12 percent drop since early 2014 and traders’ expectations of a further slide.

Only intervention by the PBOC in recent weeks has kept it from falling through the key 7 per dollar level in onshore markets.

TIGHTER CAPITAL CONTROLS, WHAT NEXT?

Though the composition of China’s reserves is a state secret, analysts agreed the falling value of other currencies it holds against the rising U. S. dollar likely accounted for some of the fall in reserves last month.

Still outflows appear to have picked up as companies and ordinary Chinese rushed to get money out of the country.

“The data suggest that net capital outflows accelerated last month from $69 billion in October to around $80 billion,” Capital Economics said in a note, adding that those were just preliminary estimates.

“That said, it is premature to talk of a renewed renminbi crisis,” Capital Economics said.

“More likely than not, the latest surge in the dollar will not be repeated in the coming months, making it easier for the PBOC to engineer a return to a more gradual pace of renminbi depreciation against the U. S. currency.”

China has announced a string of measures recently to tighten controls on money moving out of the country, adding to speculation that potentially destabilizing capital outflows were on the rise.

The State Administration of Foreign Exchange (SAFE) has begun vetting transfers abroad worth $5 million or more and is increasing scrutiny of major outbound deals, even those with prior approval, sources told Reuters last week.

China also will rein in risks from “irrational” outbound investment deals, Xinhua news agency said on Tuesday, citing a variety of officials.

“We think a second response (after tighter exchange controls) will be a shift in the PBOC’s yuan fixing policy to give greater weight to stabilizing spot yuan and less to stabilizing the yuan against a basket (of currencies of its major trading partners),” ING Asia economist Tim Condon said in a research note on Thursday.

A senior central bank researcher told Reuters last week that Beijing needs to break a negative feedback loop where expectations of further yuan weakness spur outflows, and fresh capital flight in turn puts more pressure on the currency.

“The capital control tightening that Chinese authorities announced is a very good indicator that capital outflows continue from China and are turning threatening,” analysts at Bank of Tokyo-Mitsubishi UFJ said in a note this week.

To be sure, the yuan is falling alongside many other currencies in the face of the strong dollar, which is being buoyed by hopes Trump will shift U. S. growth into faster gear.

BOTTOM LINE?

French bank Societe Generale said earlier this year that International Monetary Fund guidelines put $2.8 trillion as the minimum prudent level for China, which is not far away if reserves keep falling at the current pace.

“The bottom line should be $2 trillion, but they could get very nervous if the reserves fall to $2.5 trillion,” said Nie Wen, an analyst at Hwabao Trust in Shanghai.

Some government economists have put the safety level at somewhere between $1.62 trillion to $2 trillion.

Additional reporting by Stella Qiu; Editing by Kim Coghill.

All quotes delayed a minimum of 15 minutes. See here for a complete list of exchanges and delays.

China Dec forex reserves fall less than expected to $3.011 trillion.

China's foreign exchange reserves fell for a sixth straight month in December but by less than expected to the lowest since February 2011, as authorities stepped in to support the yuan ahead of U. S. President-elect Donald Trump's inauguration.

China's reserves shrank by $41 billion in December, slightly less than feared but the sixth straight month of declines, data showed on Saturday, after a week in which Beijing moved aggressively to punish those betting against the currency and make it harder for money to get out of the country.

Analysts had forecast a drop of $51 billion.

For the year as a whole, China's reserves fell nearly $320 billion to $3.011 trillion, on top of a record drop of $513 billion in 2015.

While the $3 trillion mark is not seen as a firm "line in the sand" for Beijing, concerns are swirling in global financial markets over the speed with which the country is depleting its ammunition to defend the currency and staunch capital outflows.

Some analysts estimate it needs to retain a minimum of $2.6 trillion to $2.8 trillion under the International Monetary Fund's (IMF's) adequacy measures.

If pressure on the yuan persists, analysts suspect China will continue to tighten the screws on outflows via administrative and regulatory means, while pouncing sporadically on short sellers in forex markets to discourage them from building up excessive bets against the currency.

But if it continues to burn through reserves at a rapid rate, some strategists believe China's leaders may have little choice but to sanction another big "one-off" devaluation like that in 2015, which would likely roil global financial markets and stoke tensions with the new Trump administration.

The yuan depreciated 6.6 percent against the surging dollar in 2016, its biggest one-year loss since 1994, and is expected to weaken further this year if the dollar's rally has legs.

Adding to the pressure, Trump has vowed to label China a currency manipulator on his first day in office, and has threatened to slap huge tariffs on imports of Chinese goods.

That has left Chinese eager to get money out of the country, creating what some researchers describe as a potentially destructive negative feedback loop, where fears of further yuan falls spur outflows that pile fresh pressure on the currency.

"For 2016 as a whole we estimate total capital outflows to have been around $710 billion," Capital Economics' China economist Chang Liu told Reuters in an .

Capital Economics estimated net outflows in November and December alone were $76 billion and $66 billion, respectively.

The main reason China's forex reserves fell in 2016 was because the central bank used them to stabilise the yuan, the country's foreign exchange regulator said in a statement after the data.

With the dollar gaining ground, a decline in the value of other currencies held by China also contributed to the decline, the State Administration of Foreign Exchange (SAFE) said.

"Forex reserves are likely to fall again in January," China's SWS MU Fund Management said in a note, predicting the U. S. economy and the dollar would continue to strengthen.

CLAMPDOWN ON OUTFLOWS TIGHTENS.

China has stepped up efforts in recent weeks to shore up the yuan and curb capital outflows, sparking speculation it wants a firm grip on the currency ahead of Trump's inauguration on Jan.20 and the long Lunar New Year holidays at the end of the month.

State banks have bought yuan and sold dollars and regulators have tightened restrictions on individuals and companies who want to move funds out of the country, while denying they are imposing fresh capital controls.

This week the central bank also set higher daily guidance rates for the yuan, hiking it the most in a decade on Friday, and Beijing was suspected of pushing up yuan borrowing costs in Hong Kong to discourage offshore investors from making bearish bets on the currency.

SAFE said in late December that net cross-border capital outflows were expected to narrow in the fourth quarter in 2016, while the People's Bank of China (PBOC) said last week that it would push reforms of the yuan regime, while keeping the currency basically stable in 2017.

The PBOC also raised reporting requirements for overseas transfers last Friday. The reporting threshold for cash and overseas transfers was cut to just 50,000 yuan ($7,230) from 200,000 yuan.

Regulators recently said they would step up monitoring of individual foreign exchange purchases to close loopholes, but the $50,000 yearly quota would not change.

While the yuan has soared this week as China bears down on the market, a Reuters poll showed it is expected to slide at least 4 percent this year, largely as expectations of interest rate hikes in the United States drive the dollar higher.

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