I’ve been watching the fundamentals for the exchange rate to deteriorate for the last couple of years. Could be the timing is now right with FDI flows as well as trade flows looking like they may have turned.
May 25 (PTI) — From K J M Varma China’s foreign exchange reserves amounting to over USD 3 trillion declined for the second straight month in December, snapping the trend of years of accumulation.
Chinese lenders bought USD 142.5 billion on behalf of their clients in December, while they sold USD 157.8 billion, marking the second monthly deficit, China’s State Administration of Foreign Exchange (SAFE) said in a statement.
The December deficit stood at USD 15.3 billion, up from USD 800 million in November.
China sits on the world’s largest forex reserves.
The SAFE data came after the central bank had said earlier this month that the country’s yuan funds outstanding for foreign exchanges fell to 25. 36 trillion yuan in December.
Analysts said the deficit, like falling yuan funds, is a result of a narrowing trade surplus, a slowdown in the growth of foreign direct investment and weakened expectation for yuan’s appreciation.
Last year, Chinese banks bought USD 1.6 trillion in foreign currency, and sold USD 1. 23 trillion, leading to a surplus of USD 367.8 billion, the SAFE statement said.
Reports of the decline came as China starts celebrating the lunar New Year, or the Spring Festival from January 23. This will mark the beginning of the ‘Year of the Dragon’, according to the Chinese Zodiac that assigns one animal, real or fabricated, to each year, repeating every 12 years.
However, experts say that this year is expected to be a tough one for China as it is seeing a declining trend in exports which is narrowing the decades of trade surplus.
Besides the dip in the forex reserves, China also saw a decline in the double digit growth rate in its economy, which grew by 9.2 per cent in 2011, with official projections that it will decline to 8.5 per cent this year in the face of falling exports and global financial crisis.
China’s trade surplus fell to 6-year low at USD 155 billion in 2011 amid shrinking exports market, even as its foreign trade surged by 22.5 per cent to hit an all-time high of USD 3.64 trillion.
The annual trade surplus narrowed to 14.5 per cent year-on-year to USD 155.14 billion in 2011, according to the General Administration of Customs (GAC).
China is the world’s second-largest importer and is expected to become the top importer in 2-3 years and contribute to global economic recovery, a senior research fellow from the Center for US-China Relations, Tsinghua University, Zhou Shijian, was quoted by the official media here as saying.