February 28, 2016 / 3:58 PM / in a year

China central bank deflects concerns over forex reserves

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A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, April 3, 2014.Petar Kujundzic

BEIJING (Reuters) - The vice-governor of China's central bank on Sunday deflected concerns over the possibility of an extended fall in the country's foreign exchange reserves and reaffirmed confidence in the strength of the Yuan.

China still owns the world's largest currency reserves but has been burning through them at such a pace that some economists and foreign exchange professionals have been questioning how low can they go before Beijing is forced to choose between fresh capital controls or giving upselling dollars to defend the yuan, also known as the renminbi.

Foreign exchange reserves in China declined by $99.5 billion in January to $3.23 trillion after a record fall the previous month. Reserves have shrunk by $762 billion since mid-2014, more than the gross domestic product of Switzerland.

Yi Gang, vice governor of the People's Bank of China (PBOC), told state news agency Xinhua that part of the recent reductions in China's massive forex reserve was down to higher holdings by companies and individuals.

The interview, shortly after the G20 financial ministers' meeting in Shanghai, was posted on the central bank's website www.pbc.gov.cn.

"The falls in forex reserve was mainly because residents increased their holdings and cut their forex debts. This process has a limit and the capital outflow will gradually slow down," Yi was quoted as saying.

"On the other hand, China still enjoys high trade surplus and direct foreign investment, resulting in still-fast capital inflow," Yi said.

Despite some fluctuations, the Chinese Yuan has held relatively steady against other currencies and the fluctuations were driven partly by some short-term speculation, Yi said.

"We have full confidence in the fundamentals of Renminbi, believing its exchange rate will be increasingly determined by the market fundamentals rather than short-term speculation," he said.

Reporting by Chen Aizhu; Editing by David Goodman

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