Dip in China's FX reserves may hasten policy shift

Fri Jan 13, 2012 1:46am EST
 
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By Koh Gui Qing

BEIJING (Reuters) - China's official reserves slipped to $3.18 trillion in the final quarter of 2011, signaling that the days of rampant export-led accumulation of foreign currency are numbered and that new monetary policy steps may be needed to counter capital outflows.

The People's Bank of China published data on Friday showing a $20.6 billion, or 0.6 percent, fall in reserves in the final three months of the year, though Beijing's stash of foreign wealth is still by far the world's largest.

Reserves dropped in November and December, the first consecutive monthly fall since the first quarter of 2009, a clear sign of the impact that a falling trade surplus and an outflow of speculative funds is having on China's capital flows.

And while the quarterly fall does not signal massive capital flight from China, analysts say it does argue for Beijing to further lower the amount of cash it makes banks hold as reserves to ensure sufficient market liquidity.

"The decline in foreign exchange reserves in Q4 is consistent with the sharp reversal in capital flows out of emerging markets in general and the region in particular," said Andy Ji, an economist at Commonwealth Bank of Australia in Singapore.

"The People's Bank of China is likely to engage in more cuts in the reserve requirement ratio (RRR) and aggressive liquidity injection through open market operations if the trend deteriorates further," he said.

FALLING EXPORT DEMAND

China lopped 50 basis points from a record high RRR of 21.5 percent at the end of November, the first cut in three years as it sought to shield its economy from falling export demand from debt-ridden Europe and lethargic U.S. consumers.   Continued...