BEIJING China's foreign exchange reserves fell far more than expected in November to the lowest level in nearly six years, as authorities struggled to stem capital outflows and shore up the sliding yuan in the face of the relentlessly rising dollar.
With U.S. President-elect Donald Trump threatening to label China a currency manipulator on his first day in office, the country's central bank is walking a tightrope, seeking to slow the yuan's descent and tightening controls on money moving out of the country to deter capital flight.
China's reserves fell by $69.06 billion (£54.6 billion) last month, the fifth straight month of declines and more than twice what economists had expected, central bank data showed on Wednesday.
The foreign exchange regulator made a rare comment on the reserves data soon after, explaining the reserves' fall as a combination of the central bank's activity and the impact of the stronger dollar, which reduced the value of other currencies held by China.
While China still has the world's largest forex reserves, they have steadily declined over the last two years to $3.052 trillion, levels not seen since March 2011.
Some traders believe the $3 trillion mark is a key psychological level for the People's Bank of China (PBOC), but it risks rapidly churning through its remaining stockpile if the U.S. dollar inexorably rises and it fights to steady the yuan.
"The central bank is making a difficult choice between the two (keeping the yuan stable or protecting its reserves)," said Wang Jun, senior economist at China Centre for International Economic Exchanges, a Beijing-based think-tank.
Last month's drop in reserves was the largest since January, when a sharp fall in the yuan and worries about China's slowing economy raised fears that Beijing could devalue its currency for a second year running, roiling global financial markets.
The central bank is widely believed to have sold U.S. dollars to support the yuan CNY=CFXS as it sunk to more than 8-1/2 year lows last month.
But the yuan's more than 5 percent slide so far this year has sparked a flurry of bets that it will weaken further, leaving traders wondering how long China can maintain its yuan defense.
The yuan fell 1.6 percent in November alone, its worst month since August 2015 when Beijing shocked global markets by devaluing the currency by almost 2 percent overnight.
Adding to pressure on the yuan and worries about the economy, Trump has vowed to label China a currency manipulator on his first day in office on Jan. 20 and has threatened to impose huge tariffs on imports of Chinese goods.
While Trump has accused China of keeping its currency undervalued to boost exports, some analysts say the yuan has been overvalued, as evidenced by its 12 percent drop since early 2014 and traders' expectations of a further slide.
Only intervention by the PBOC in recent weeks has kept it from falling through the key 7 per dollar level in onshore markets.
TIGHTER CAPITAL CONTROLS, WHAT NEXT?
Though the composition of China's reserves is a state secret, analysts agreed the falling value of other currencies it holds against the rising U.S. dollar likely accounted for some of the fall in reserves last month.
Still outflows appear to have picked up as companies and ordinary Chinese rushed to get money out of the country.
"The data suggest that net capital outflows accelerated last month from $69 billion in October to around $80 billion," Capital Economics said in a note, adding that those were just preliminary estimates.
"That said, it is premature to talk of a renewed renminbi crisis," Capital Economics said.
"More likely than not, the latest surge in the dollar will not be repeated in the coming months, making it easier for the PBOC to engineer a return to a more gradual pace of renminbi depreciation against the U.S. currency."
China has announced a string of measures recently to tighten controls on money moving out of the country, adding to speculation that potentially destabilizing capital outflows were on the rise.
The State Administration of Foreign Exchange (SAFE) has begun vetting transfers abroad worth $5 million or more and is increasing scrutiny of major outbound deals, even those with prior approval, sources told Reuters last week.
China also will rein in risks from "irrational" outbound investment deals, Xinhua news agency said on Tuesday, citing a variety of officials.
"We think a second response (after tighter exchange controls) will be a shift in the PBOC’s yuan fixing policy to give greater weight to stabilizing spot yuan and less to stabilizing the yuan against a basket (of currencies of its major trading partners)," ING Asia economist Tim Condon said in a research note on Thursday.
A senior central bank researcher told Reuters last week that Beijing needs to break a negative feedback loop where expectations of further yuan weakness spur outflows, and fresh capital flight in turn puts more pressure on the currency.
"The capital control tightening that Chinese authorities announced is a very good indicator that capital outflows continue from China and are turning threatening," analysts at Bank of Tokyo-Mitsubishi UFJ said in a note this week.
To be sure, the yuan is falling alongside many other currencies in the face of the strong dollar, which is being buoyed by hopes Trump will shift U.S. growth into faster gear.
French bank Societe Generale said earlier this year that International Monetary Fund guidelines put $2.8 trillion as the minimum prudent level for China, which is not far away if reserves keep falling at the current pace.
"The bottom line should be $2 trillion, but they could get very nervous if the reserves fall to $2.5 trillion," said Nie Wen, an analyst at Hwabao Trust in Shanghai.
Some government economists have put the safety level at somewhere between $1.62 trillion to $2 trillion.
(Additional reporting by Stella Qiu; Editing by Kim Coghill)