China's foreign currency reserves fell below $3 trillion for the first time in more than five years, officials said Tuesday, as capital outflows accelerated owing to the reduced value of the yuan.
Reserves were tabbed at $2.998 trillion in January, down $12.3 billion from the previous month and building on the $41 billion decline recorded between November and December, the People's Bank of China said. Over the past two years, the government has drained around $833 billion in currency reserves, mostly U.S. dollars, amid one of the biggest sustained declines for the yuan on global markets since 1994.
The dollar extended gains on the release, with the dollar index, a measure of the greenback's strength against a basket of global currencies, rising 0.63% to 100.51. The news also put sustained downward pressure on both the euro and the pound, although both European currencies were trading lower as political uncertainty in the region continued to weigh on sentiment.
Earlier Tuesday, the PBOC set the mid-point for onshore yuan trading at 6.8604 against the dollar, marginally stronger than the previous setting, in order to limit bank and high net-worth clients from moving cash into the higher-yielding U.S. currency.
Capital outflows from China have accelerated since the U.S. Federal Reserve began signalling faster rate increases for the world's largest economy, a move which lifted bond yields and increased the attraction of fixed income asset for global investors.
Bloomberg Intelligence estimates that more than $1.2 trillion has left China since August 2015 as the PBOC sold dollars to prop up a weakening yuan, which fell 6.6% against the greenback last year, the steepest decline in at least two decades. The government, in response, has put new rules in place to stem the flow of cash overseas, capping credit card purchases and adding new disclosure requirements on foreign exchange purchases.
