By Koh Gui Qing
BEIJING, Jan 13 China's official reserves
slipped to $3.18 trillion in the final quarter of 2011,
signalling that the days of rampant export-led accumulation of
foreign currency are numbered and that new monetary policy steps
may be needed to counter capital outflows.
The People's Bank of China published data on Friday showing
a $20.6 billion, or 0.6 percent, fall in reserves in the final
three months of the year, though Beijing's stash of foreign
wealth is still by far the world's largest.
Reserves dropped in November and December, the first
consecutive monthly fall since the first quarter of 2009, a
clear sign of the impact that a falling trade surplus and an
outflow of speculative funds is having on China's capital flows.
And while the quarterly fall does not signal massive capital
flight from China, analysts say it does argue for Beijing to
further lower the amount of cash it makes banks hold as reserves
to ensure sufficient market liquidity.
"The decline in foreign exchange reserves in Q4 is
consistent with the sharp reversal in capital flows out of
emerging markets in general and the region in particular," said
Andy Ji, an economist at Commonwealth Bank of Australia in
"The People's Bank of China is likely to engage in more cuts
in the reserve requirement ratio (RRR) and aggressive liquidity
injection through open market operations if the trend
deteriorates further," he said.
FALLING EXPORT DEMAND
China lopped 50 basis points from a record high RRR of 21.5
percent at the end of November, the first cut in three years as
it sought to shield its economy from falling export demand from
debt-ridden Europe and lethargic U.S. consumers.
Economists polled by Reuters expect China to cut 200 bps
from RRR this year, anticipating more sluggish export growth.
Data this week showed Chinese exports growing at their
weakest pace in more than two years in December, helping shrink
China's 2011 trade surplus to a three-year low of $155 billion.
Bank of America-Merrill Lynch Economist, Ting Lu, expects a
trend of sinking surpluses to retard capital flow into China,
necessitating a policy response to keep economic conditions as
stable as possible ahead of a change in the country's top
political leadership anticipated in late 2012.
"The drop in foreign currency inflow will have significant
implications for China's monetary policy, but limited impact on
liquidity conditions if policymakers are flexible in using
monetary tools," Lu said, adding that he expects more reserve
"Chinese policymakers will be reluctant to see any risk of a
capital flight in 2012 as they seek for stability during
leadership change, " he said.
Separate data showed China may have experienced a third
month of capital outflows in December after the central bank and
commercial banks sold a net 100.3 billion yuan ($15.9
billion)worth of foreign exchange in December.
HUGE RESERVE RISES "HISTORY"
The drop in China's reserves may start to appease some
critics who say they are a product of an economy reliant on an
under-valued yuan for export-driven growth.
The median forecast by economists was for China's foreign
exchange reserves to have held steady at the end of December
from the end of the third quarter.
China reserves are the largest in the world, largely due to
the central bank's sterilisation of dollar inflows into the
country's closed capital account.
But some analysts noted that increasing use of the yuan in
trade settlements would also help slow China's future build-up
of foreign currencies.
"Foreign exchange reserves may rise further in a long term
view" but the era of sharp increases is "history", said Hua
Zhongwei, an economist with Huacheng Securities in Beijing.
In the third quarter of 2011, foreign exchange reserves rose
just $4.2 billion to a record of $3.2 trillion. The pace was
markedly slower than a $152.8 billion rise in the second