viernes, 11 de septiembre de 2015

viernes, septiembre 11, 2015


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

By Lingling Wei And Anjani Trivedi

A 100 yuan banknote sits beside a $100 banknote. China’s foreign-exchange reserves fell $93.9 billion in August from July.
A 100 yuan banknote sits beside a $100 banknote. China’s foreign-exchange reserves fell $93.9 billion in August from July. Photo: Reuters


BEIJING—One of the world’s largest piles of cash is rapidly shrinking.

In another sign of a new normal for the Chinese economy, and the world, China’s central bank on Monday said its foreign-currency reserves fell a record $93.9 billion in August, a month when it intervened intensely in the currency market to prop up the yuan.
 
The drop underlined the shifting role for a stockpile of money that had steadily accumulated since the mid-1990s as China bought dollars and other currencies from its exporters and one that had turned China into a gargantuan investor in U.S. Treasurys.

At $3.56 trillion as of the end of August, the currency reserves held by the People’s Bank of China still account for nearly a 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.

The outflows have speeded up since China devalued the yuan in mid-August, a move that has prompted the central bank to dip deep into the pile to defend the yuan from a free fall and too much money from leaving Chinese shores.

“It’s a new normal for China’s capital flows,” said Larry Hu, an economist at Macquarie Group Ltd., a Sydney-based investment bank.

For years, companies and investors poured money into yuan assets in China, hoping to gain not only from investing in a rapidly growing economy, but also from a currency that was set for appreciation—rising over 30% in the last decade. Those bets have been upended both by China’s yuan devaluation and signs of a deepening economic slowdown.

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 implications for the rest of the world of a shrinking Chinese reserve pile could be profound.

China’s selling of U.S. Treasury debt as it has bought yuan has led to concerns that bond yields in the U.S. and Americans’ borrowing costs in general could be pushed up.

So far, though, that hasn’t occurred, as other investors—such as U.S. bond funds—have stepped into what Beijing has sold. Yields on the 10-year U.S. Treasury note have been falling from this year’s peak of 2.5% set in June. Bond yields fall as prices rise.

But the continued 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 some central banks’ ability to exit easy-money policies.

It 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 and have no comparison to any period in the past, ”said Nikolaos Panigirtzoglou, global market strategist at J.P. Morgan in London. And, he says, “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.” He says 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.

The strengthening dollar has also drawn more investors into Treasurys.

Another reason Chinese 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 the GDP.

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. By other measures too, China’s reserves give the country a sufficient cushion. It has sufficient reserves to pay for 22 months of imports.

But currency reserves have dwindled by 10% since their peak last year and are down more than 7% this year. Investors say as China turns away from an export-oriented economy to one led by consumption, its foreign-exchange reserves that have long been an economic buffer, are bound to come under further pressure.

“Capital outflow is a big concern,” said an official close to the central bank. That’s despite the fact that Beijing still has a big war chest of reserves to defend the yuan. At stake is China’s glut of savings—deposits currently stand at $21 trillion, or nearly twice the economy --which could stream out of the country if the yuan continues to weaken and authorities loosen their grip over cross-border capital flows.

Based on central-bank data, the drop in the reserves was the largest single monthly drop in absolute terms, and the biggest fall on a percentage basis since May 2012, during another period of rapid capital exodus.

Economists had estimated the drop in China’s reserves in August at between $70 billion and $100 billion. Some analysts had expected outflows of as much as $150 billion.

“Today’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.

Mr. Evans-Prichard 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 outflows, while large, aren't flighty capital, some analysts say. As Chinese companies buy up foreign assets and amid programs by the central bank that make it easier for companies to repatriate profits, larger amount of cash are now leaving China’s borders. At the same time, foreign direct investment continues to trickle in but at a slower pace this year than in the past.

This year, the central bank has encouraged large, foreign institutional investors like central banks and sovereign-wealth funds to invest in the onshore Chinese market, removing stringent investment barriers to drive up inflows.

The latest depreciation pressure on the yuan is partly Beijing’s own doing. For most of the past year, the Chinese central bank kept the yuan largely pegged to the dollar, effectively pushing up its value against the currencies of China’s trading partners and, in effect, hurting exporters.

Then on Aug. 11, the central bank devalued the yuan by lowering its official reference rate—around which the currency is allowed to trade -- by nearly 2%, saying it intended to give market forces bigger sway in deciding its value. But the heavy selloff that followed -- triggered by concerns that Beijing would permit more weakening of the yuan to help spur growth -- caught officials at the central bank somewhat off guard, according to people close to the PBOC.

The central bank then resorted to two strategies to try to stem the yuan from falling further, according to the people. First, prior to the opening of daily trading, the central bank has been providing state-owned banks, who 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 Chinese currency 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 interference 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.

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