China’s foreign exchange reserves likely to have dropped sharply in November

Given the renewed capital outflow pressure, especially after Trump’s victory, the Chinese yuan weakened around 1.9 percent against the U.S. dollar in November; however, it remained relatively well against a basket of currencies. It is becoming quite evident that the Chinese central bank, the People’s Bank of China, is quite willing to permit the yuan to follow market forces than before, allowing the currency to decline as quickly as market forces dictate more often than before an intervening sporadically only when USD/CNY nears some psychologically significant levels or is declining more rapidly than necessary to keep the CFETS basket stable, said Societe Generale in a research note.

But the sharp depreciation in the Japanese yen and the euro, along with the market re-pricing of higher bond  yields, possibly translated into a negative valuation impact of about USD 40 billion to USD 50 billion on outstanding foreign exchange reserves. This, along with moderate central bank intervention, possibly resulted in a decline of around USD 70 billion in the foreign exchange reserves headline figure in November that might be the largest drop in 10 months. The possibility of free floating currency is increasing steeply, stated Societe Generale.