BEIJING: China’s foreign exchange reserves slipped in May to the lowest level since 2011 as the yuan weakened amid a possible decision by the US Federal Reserve to hike interest rates.
The world’s largest currency hoard fell by US$28 billion to US$3.19 trillion last month, the People’s Bank of China said in a statement yesterday.
The foreign exchange reserves rebounded by a combined US$17 billion in March and April, after falling for 18 out of 20 months until February. In May 2015, the reserves stood at US$3.71 trillion.
The outflow of the reserves in May was said to be triggered by a possible Fed hike in June and a stronger greenback against the yuan whose exchange rate weakened 1.5 percent last month, the largest in nine months.
Despite fresh weakness against the dollar, the People’s Bank of China didn’t intervene much in the foreign exchange market last month as the market reacted calmly to the yuan devaluation, analysts said.
The PBOC announced a new exchange-rate fixing regime and cut the yuan’s daily mid-point trading price by nearly 2 percent on August 11. The yuan weakened sharply after that, which caused a rapid outflow in the reserves.
Concerns over China’s foreign exchange strategies emerged as signs showed that the country was selling dollars to support the yuan and stem capital outflows, while the market feared another Fed hike would worsen the situation.
Although the disappointing US employment data released on Friday — only 38,000 new jobs were added in May instead of a market consensus of 160,000 — largely eliminated the chance of the Fed to tighten the policy when they meet next Tuesday in Washington, many market insiders still insist rates may be raised once or twice in 2016, which will hit the yuan and China’s foreign exchange reserves.
“Since December, the Fed has stayed on the sidelines since its first rate hike in nearly a decade, which has given China a little more time and space to adjust itself,” Japan’s Daiwa Securities Co said in a recent note. “But we retain our view the Fed will tighten its stance again in July and pressure on the Chinese currency will return.”
