This entry is part 135 of 135 in the series Currency Market

China’s foreign currency holdings remained above $3 trillion in December even as the yuan capped its steepest annual decline in more than two decades.

Reserves fell $41.08 billion to $3.01 trillion, the People’s Bank of China said in a statement Saturday. That matched a $3.01 trillion estimate in a Bloomberg survey of economists.

China may take measures to keep its foreign-currency stockpile from slipping too far below the key $3 trillion mark to avoid hurting investor confidence and spurring further declines in the yuan, according to economists at major banks. Policy makers have recently rolled out extra requirements for citizens converting yuan into other currencies after the annual $50,000 quota for individuals reset Jan. 1.

“China’s government is well positioned to control outflows more effectively if it wants to, though it may not want to be seen as reversing China’s ‘opening’ strategy,” Wang Tao, head of China economic research at UBS Group AG in Hong Kong, wrote in a recent note. “In the long run, it may not have much choice if FX reserves fall more sharply on the back of intensifying capital outflow pressures.”

Central Bank

The decline of foreign exchange reserves in December was mainly because the central bank supplied funds to maintain balance in the foreign exchange market and the depreciation of non-U.S. dollar currencies, the State Administration of Foreign Exchange said in a separate statement on Saturday. For the full year of 2016, the SAFE said the central bank’s effort to stabilize the yuan was the key reason for the drop in reserves.

“The combination of policy-induced yuan stabilization and higher reporting requirements for households buying FX will buy the PBOC a little breathing room, preventing escalating outflows in the first month of the year,” Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a note.

Policy makers intensified new measures at the beginning of the new year to choke capital outflow including extra requirements for citizens converting yuan into foreign currencies. Last week, the currency posted greater volatility, with the offshore rate notching up its biggest two-day gain on record just days after completing its worst yearly performance against the dollar.

The yuan fell 0.9 percent last month, capping a 6.5 percent drop over the year.

Policy makers now may prefer using capital controls instead of burning through foreign exchange reserves to defend the yuan, said Gao Yuwei, a researcher at the Bank of China Ltd.’s Institute of International Finance in Beijing.

Dollar Rally

There are still uncertainties facing the yuan as to whether the resurgent dollar will continue its rally in January and the Federal Reserve’s future U.S. interest-rate hikes, said Wen Bin, a researcher at China Minsheng Banking Corp. in Beijing.

China’s gold reserves stood at $67.9 billion by the end of December, compared with $69.8 billion a month earlier. The nation kept gold reserves unchanged at 59.24 million troy ounces for a second month in December, the first time it halted purchases for two consecutive months since disclosing holdings as of June 2015.

By Bloomberg News

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