Forex trading

It may boast the largest reserves of foreign wealth anywhere in the world, but China’s forex reserves slumped in its latest quarterly report – for the first time in more than 10 years.

In a huge shock for the forex trading markets, China’s wealth dropped from $3.2trillion reported in September, to $3.18trillion at the conclusion of the year.

According to forex trading analysts, the crisis in the euro zone may be partly to blame for China’s falling forex reserves – with the country now needing to safeguard its market liquidity.

Reserves fell for the first time in 16months back in September, when they shrank by $60.8billion – yet the total value for the quarter had still increased compared to the previous three months. However, this was followed by the positions of China’s banks’ yuan purchases dropping in October – the first fall of its kind in four years.

China then suffered a monthly fall in both November and December – the first successive monthly drop since 2009 – primarily due to increased capital outflow and an ever decreasing trade surplus. Part of the reason for the increased outflow is the debt crisis in Europe which is leading investors into selling market assets.

Speaking to China Daily, Kevin Lai, an analyst at Daiwa Capital Markets, commented that the capital outflows in China are likely to continue throughout the year with economic growth in the country slowing down. So with less foreign investment, forex reserves will continue to fall.

In turn, the declines in forex have hurt the domestic Chinese market with the People’s Bank of China deciding to suspend its sales of central bank bills while conducting reverse repurchases ahead of the New Year in China on January 23. These required reserves are money that is held by banks as a guarantee – and reducing this ratio will make it possible for banks to lend more money.

It may also be necessary for China’s government to loosen its monetary policy because of the absence of foreign money - it is likely to continue the trend it established in December and free more cash for banks to lend. During the month, they lent a total of 640.5billion yuan – a figure much higher than predicted by most analysts.