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 $20.6bn, or 0.6 per cent, 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 Singapore.
"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.
City A.M. Reporter