China’s Forex Reserves Dip to $3.20 Trillion in July

China’s central bank released data last week that indicated that the country’s foreign exchange reserves had dropped to $3.20 trillion in the month of July. However, industry analysts had expected the reserves to fall. The drop was $4.10 billion and it came on the back of a $13.4 billion rebound that took place in June after May’s 5-year low point.

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The People’s Bank of China also released data to show that the country’s gold reserves jumped from $77.43 billion at June end to $78.89 billion at July end. The central bank had increased sale of foreign exchange over the past three months as part of its efforts to protect the Yuan also known as renminbi (RMB) from the extreme volatility brought about by Britain’s vote to exit the European Union. In fact, the bank said that it had been successful at regulating foreign exchange flows whilst maintaining sufficient reserves of foreign exchange and a good current account surplus.

People’s Bank of China

The People’s Bank of China (PBOC or PBC) has the power to carry out monetary policy as well as regulate financial institutions in mainland China. Established on 1 December 1948, the PBOC has more financial assets than any of the single public institutions. In fact, it is second only to the USA’s Federal Reserve System when compared to the overall bank assets. Moreover, the PBOC has established nine regional branches in China’s major cities and two operation offices in Chongqing and Beijing. Zhou Xiaochuan is the current Governor of the PBOC.

China had rattled global markets when it devalued the RMB in August 2015, causing a massive $513 billion drop in its foreign exchange reserves. The currency is very close to its six-year low point at present but the government regulator is taking steps to control the speculative sale of capital. The dip below 6.7 per dollar had prompted the central bank to take corrective measures to arrest the depreciation.

Industry experts and economists do acknowledge that tighter regulations on currency trading have worked to control capital flight, but there exist many questions about outflow of money via hidden channels. In fact, there are some contradictions in the released data that raise the doubt that there is a lot of pressure on the capital. Furthermore, many analysts also believe that the RMB will drop further against the dollar, and bring about another round of outflows.

Reuters released the results of a poll that indicated that experts expect the RMB to fall around 3 percent against the dollar within 12 months. The Dollar is currently rising in value and a rate rise is also expected. China’s economy, on the other hand, is struggling to keep to its pace of growth. The People’s Bank of China announced Wednesday that its aim was to keep the RMB as stable as possible by continuing with market-focused reforms in interest rates.

China’s economy has no doubt expanded at a better pace than anticipated during the second quarter, but private investment growth has been very disappointing. It is evident that people jittery about the country’s economic growth have been parking their money overseas. This will definitely compel the government to launch measures to support its economy. However, questions are being raised about the Chinese government’s ability to support the currency even though it does have a very large war chest to depend upon. Even so, economists have pointed out that the outflows are not indicative of a panicked reaction but merely an attempt to stay safe of expected short-term drop in the currency’s value. Another overlooked reason for increased Dollar buying was that many Chinese had travelled abroad during holidays for the Lunar New Year.