Shift reflects outlook for weaker yuan
The nation's foreign exchange reserves fell $27.9 billion month-on-month in May to $3.19 trillion, the sharpest monthly drop since February this year, data from the State Administration of Foreign Exchange (SAFE) showed on Tuesday.
"The decline of foreign exchange reserves in May was mainly due to the pressure of capital outflows, which reflected rising expectations of a continued depreciation of the yuan," Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times on Tuesday.
However, investors don't need to worry too much because China's foreign exchange reserves are still fluctuating within a normal range, said Zhou, noting that reserves rose month-on-month in March and April.
China's reserves, the world's largest, stood at $3.23 trillion in January, $3.20 trillion in February, $3.21 trillion in March and $3.22 trillion in April, according to the official data from the SAFE.
The markets have gradually become accustomed to a two-way float of the currency, which means that foreign exchange reserves will also rise or fall with the fluctuation of the yuan, noted Zhou.
Capital outflows eased in China earlier this year. In the first quarter, the nation had a foreign exchange settlement deficit of $124.8 billion, although that was down from $164.4 billion in the fourth quarter of 2015, according to the SAFE data.
The US Federal Reserve Board is expected to raise interest rates soon, which will boost the dollar and put pressure on the yuan, said Zhou, although the Chinese currency won't weaken much in the short term.
The central parity rate of the yuan declined 225 basis points to 6.5693 against the dollar on May 25, a 5-year low.
The People's Bank of China sets the central parity rate and allows the yuan to rise or fall by 2 percent from that rate in the spot market.
The central government won't change its monetary policy much in the short term despite fluctuations in the yuan, Liu Dongliang, a senior analyst at China Merchants Bank, wrote in a note sent to the Global Times in May.
