China has seen a three year low of its foreign exchange reserves in January. This has now raised serious questions over China’s policy to safeguard Yuan by burning their funds.
The drop in the foreign exchange reserves of China is said to be the lowest in more than three years. It has been reported that the Chinese stockpile of foreign currency fell by $99.5 billion in January and now it is at $3.23 trillion. There was a bigger drop seen in December as well as the China’s foreign currency reserves fell by a record $107.9 billion. It has been facing a decline since August last year and the trend seems to have no end.
The central bank had devalued Yuan in mid August all of a sudden. The bank said that it is doing this to bring the value of Yuan to be on cue with the market forces. This action by the central bank has boomeranged very badly. The investors started to sell off their currency in a hurry. The outcome of this was that the central bank dug into its reserves to stabilize the currency.
Also, last month the central bank once again intervened and drew its reserves to help the weakening Yuan to recover. This move has led to a deeper slowdown of the Chinese economy. This set off a selling of the stocks and commodities in the international markets.
The economic analysts and the Forex investors are not happy with the frequent interventions made by the central bank. There are doubts in many people’s minds as to how the central bank will be able to stabilize the currency and to prevent the money from going out of the country. If you want to know more about Forex and why it is so popular, then Look Here for an Explanation ‘What is the Reason Behind the Popularity of Forex?’
The central bank of China is expecting this to be a long drawn battle. The slowing of the economy is no way, helping the bank. Hence, it is finding it very difficult to stabilize the currency. As the bank is having enough money in the reserves to withstand such shocks, it will continue in the same vein for some time.
There are fears in the trader’s mind that the poor domestic economic conditions will make China again think of devaluing the Yuan. But, they can breathe a sigh of relief as the Chinese rulers have said that there will be no huge devaluation of the Yuan in the near future.
The current drop in the foreign reserves of China is lower than what was expected. This will make traders and people to be not thinking of China all the time. But, there are no concrete evidences from the Government or the bank side as to why the devaluation of the Yuan is taking place and why there is an economic meltdown in China.
The fear that China has lost its control over Yuan is very much new to this country. The recent fall in the foreign exchange reserves is in complete contrast to the piling up of cash a few years ago when China’s economy and its exports was seeing a huge boom.