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Yearender: 'New normal' of China's forex reserves

2014-12-29 GMT+8:00

BEIJING, Dec. 29 (Xinhua) -- China's foreign exchange reserves will stop unilateral increases to show more ups and downs in the future, which economists believe to be a new normal.

The country's foreign exchange reserves dropped 105.513 billion U.S. dollar in the third quarter from the second quarter, according to Xinhua's calculations based on data from the People's Bank of China (PBOC), China's central bank.

China's foreign exchange reserves fell to 3.8877 trillion U.S. dollars at the end of September from 3.993213 trillion U.S. dollars at the end of June, the largest quarterly fall since 1996, and the second such a decline in the past two years.

Some analysts are concerned that the decline may suggest speculative hot money outflows amid market jitters over China's economy.

But Guan Tao, head of international payments department at State Administration of Foreign Exchange (SAFE), at a press conference in October, cited the rise in the U.S. dollar against other major currencies as a main factor causing the decline, as dollar's appreciation reduces the value of the proportion of the reserves in other currencies.

Market observers believe the reduction may also have something to do with increased usage of Chinese currency renminbi for international trade settlements. Moreover, Chinese entrepreneurs are expanding their investment overseas, which can also explain the fall in foreign reserves.

A report by the Haitong Securities shows that Chinese citizens' strong willingness to hold foreign currencies and hot money outflows have been two primary causes of the fall.

Foreign exchange reserves may become a burden for China, because such reserves could stoke inflation in the future, economists note, explaining that as the yuan is not fully convertible at present, China's central bank has to buy foreign-currency inflows generated by foreign investment or trade surplus from banks, resulting in an injection of renminbi funds into the banking system which can create potential inflation pressure.

Chinese regulators have pledged to keep foreign exchange reserves at a reasonable level, partly by reducing central bank's intervention in the foreign currency market, in an effort to ease the worries.

PBOC vice governor Hu Xiaolian said in November that the central bank has largely withdrawn from routine interventions in the onshore foreign exchange market since the second quarter of 2014.

According to SAFE, Chinese banks sold more foreign currencies than bought for their clients in November, marking the third successive month of net sales after 24 consecutive months of net purchases.

SAFE data showed that Chinese banks sold 911.3 billion yuan in foreign currencies for clients and bought 867.3 billion yuan last month, resulting in 44 billion yuan worth of net foreign-currency sales in the month.

Banks' foreign-currency purchases and sales are one of the main factors behind changes in China's foreign exchange reserves.

Meanwhile, China's trade surplus hit a record 54.474 billion U.S. dollars in November, expanding 61.4 percent on a yearly basis, and foreign direct investment inflows into the Chinese mainland, excluding investment in the financial sector, rose 22.2 percent from a year earlier to reach 10.36 billion U.S. dollars last month.

Analysts predict that China's foreign exchange reserves will continue the two-way movements in the future. (Edited by Ding Lei,