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China’s foreign exchange reserves fell below $3tn for the first time in nearly six years last month as its central bank spent more of its war chest on propping up the value of the renminbi and Beijing imposed new capital controls in an effort to slow the pace of outflows.

Reserves at the People’s Bank of China fell $12.3bn to $2.998tn in January, a decline of 0.4 per cent from December’s level. If only by the slimmest of margins, this is the first time forex reserves dropped below the $3tn mark since February 2011.

A median forecast from economists polled by Reuters had predicted a fall of only 0.3 per cent from December.

The seventh consecutive monthly fall points to abiding difficulty for policymakers. Since the renminbi’s sharp depreciation in August 2015, Beijing has sought to combat more severe softening against the greenback by selling dollars from the central bank’s foreign exchange reserves and ratcheting up capital controls.

Last month provided some respite as the renminbi strengthened 0.9 per cent against the dollar in January to Rmb6.884. Over the same period the dollar index tracking the greenback against a basket of peers softened 2.6 per cent.

Yet the renminbi is still down 4.4 per cent from a year ago. The dollar is likely to strengthen further if the US Federal Reserve continues on its intended regimen of monetary policy tightening and Chinese households appear to expect the renminbi to depreciate further this year.

A ratcheting up of capital controls since November has served to slow outflows – which came in lower than expected in December – but not stop them.

Controls have begun interfering with cross-border operations as well: outbound overseas deals worth nearly $75bn were cancelled in 2016 as a regulatory clampdown and restrictions on foreign exchange put the kibosh on 30 acquisitions with European and US groups.

Copyright The Financial Times Limited 2017. All rights reserved.
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