PBoC’s Intervention: Sharp Cut in Foreign Exchange Reserves
Bumpy Ride Continues: Bearish Outlook for the Chinese Yuan
PBoC’s FX intervention
The PBoC (People’s Bank of China) used a strong intervention to secure the steep fall in the yuan and provide some stability to the rattled markets. Foreign exchange reserves with the central bank saw a massive fall in 2015 of about $500 billion in order to prevent a sharp devaluation of the yuan. In December, the PBoC used $108 billion of reserves to keep the currency from devaluing majorly against the US dollar.
Advise against use of FX reserves
Bank of Japan governor Haruhiko Kuroda advised China to employ capital controls instead of burning through its FX reserves. The outflow is expected to continue due to lower global demand and the depressed price outlook for major commodities (DBC). IMF (International Monetary Fund) chief Christine Lagarde also stated that it doesn’t expect the PBoC to use its FX reserves so aggressively. The PBoC has less flexibility in managing the value of the yuan now that it’s part of the elite special drawing rights basket of currencies managed by the IMF. China (MCHI) (YINN) deployed capital controls like keeping a reserve requirement ratio for deposits in the offshore yuan by banks and cracking down on international transfers done illegally in the Chinese yuan.
Bearish outlook considering the fundamentals
This year, the yuan’s outlook seems biased towards a depreciating note against the US dollar. Export growth in China took a massive hit in 2015. There was also a dip in the foreign exchange reserves. A continuing economic slowdown could prompt the PBoC to introduce fresh stimulus measures and intervene more in the foreign exchange markets. Also, a fall in the yuan could lead to outflows in terms of foreign investments. Speculations will strengthen that the US Dollar Index will move higher as the Fed increases interest rates more. High levels of debt building in the economy and depressed commodity prices globally are also expected to weigh on the Chinese yuan in 2016. The bearish outlook has been leading to outflows from commodity exporting companies (PBR) (EC) (TTM) in emerging market economies.
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