China's foreign exchange reserves saw their biggest ever monthly drop in December, falling to a three year low, official figures showed, as the central bank sells dollars to prop up its currency. The country's foreign exchange stockpile, the world's biggest, declined to $3.3 trillion last month, down some $108 billion from November, according to figures released by the State Administration of Foreign Exchange (SAFE).
The reserve drop came as the People's Bank of China (PBoC) sells dollars to buy yuan amid a capital flight spurred by slowing growth in the world's second largest economy. December's drop was the biggest monthly decline on record, Bloomberg News reported.
Forex reserves now stand below the median forecast of $3.4 trillion, according to economists surveyed by Bloomberg, and the lowest since December 2012. China's total reduction last year was $513 billion, its first annual decline, with economic growth expected to have slowed to its lowest pace in a quarter of a century. Official data on fourth-quarter and annual growth is due to be released later in January.
"The PBOC is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure," Chen Xingdong, a Beijing-based chief China economist at BNP Paribas SA, told Bloomberg. "The PBOC now wants to maintain stability." China weakened the value of its yuan currency by 0.51 percent against the US dollar on Thursday, marking the biggest drop since August, when Beijing guided the normally stable unit down by nearly five percent in a week in a surprise devaluation.
Analysts believe yuan will keep depreciating this year despite Beijing's tight grip on currency flows. The yuan can only move up or down against the US dollar by two percent from a mid-rate set daily by the central People's Bank of China (PBoC). "The fact that the central bank cut the fixing so much this week signalled that the authorities are worried that the economy is challenged by increasing downward pressures," Nathan Chow, economist at DBS Group Holdings, told Bloomberg. "Considering the weak fundamentals, the long-term trend for the yuan to weaken and for the capital to leave the nation hasn't changed."