The Peoples Bank of China has reported that the nation’s foreign reserves plunged in January, dwindling by $99.5 billion.
In an attempt to boost the value of the RMB, China has been deliberately draining its foreign currency holdings. With $3.23 trillion on reserve, China is still by far the biggest foreign currency holder in the world.
The strategy is designed to ease fears in Beijing that investors could rapidly devalue the currency. This fear is illustrated by warnings issued by Beijing recently to notorious currency trader George Soros that any attempt to short-sell the Yuan was doomed to failure.
With many Chinese firms holding debt in dollars, any significant devaluation in the Yuan could spark serious trouble and hinder their ability to manage debt. To counter this, the PBoC has been selling dollars and buying Yuan in an attempt to stop it falling too rapidly.
The draining of foreign reserves is part of a multi-pronged approach including banning some foreign banks from participating in Forex trading, and ordering offshore banks to hold their Yuan reserves.
Investors are watching closely to see what Beijing does next. Endless selling of dollars is not a long-term solution and is likely to spark uncertainty and fear rather than ease it, just as implementing a circuit breaker system in the stock market did earlier in the year.
Is the Yuan set for a steep drop in the near future? Possibly. Currency traders keep your eyes on this story!