(Updates with economist’s comment in the fourth paragraph.)
Jan. 13 (Bloomberg) -- China’s foreign-exchange reserves posted the first quarterly decline in more than a decade, as foreign investment moderated, the trade surplus narrowed and investors withdrew capital amid the global financial crisis.
The holdings, the world’s biggest, fell to $3.18 trillion at the end of December from $3.2 trillion at the end of September, according to People’s Bank of China data released in Beijing today. That was the first quarterly contraction since the second quarter of 1998, according to data compiled by Bloomberg.
Slower growth in foreign-exchange reserves may provide Premier Wen Jiabao with ammunition to defuse overseas criticism of the nation’s currency policy and may add pressure on the central bank to lower lenders’ reserve requirement ratio to boost liquidity. The global downturn may lead to capital withdrawal “of a large magnitude” this year, central bank governor Zhou Xiaochuan said in an interview with the Xinhua News Agency published Jan. 8.
“This is a good argument against U.S. calls to appreciate the yuan more,” Dariusz Kowalczyk, a senior economist at Credit Agricole CIB in Hong Kong, said before the release. “China’s external position has become almost balanced, there is almost no market pressure on the yuan to appreciate and 2012 will be a year of very slight gains of the currency at best.”
The decline in foreign-exchange holdings may also open the door to a widening of the yuan’s trading band, Kowalczyk said. The currency is allowed to trade 0.5 percent above or below a daily reference rate for the dollar set by the central bank.
Capital outflows and changes in the values of foreign currencies are among factors that may have pulled down gains in the foreign-exchange reserves. The U.S. dollar strengthened during the quarter, leading to falls in the dollar value of China’s non-dollar holdings, Mark Williams, a London-based economist at Capital Economics Ltd. said in a Jan.9 note.
An estimated $34 billion may have moved out of China in the third quarter alone, driven by a mix of escalating fear over China’s hard landing, a worsening euro area crisis and concerns the yuan may fall against the dollar, Lu Ting, an economist at Bank of America Corp. in Hong Kong, said in a Jan. 5 report.
China should use more of its foreign-exchange reserves to make direct investments overseas, Zheng Xinli, vice president of the state-backed China Center for International Economic Exchanges, said at a forum in Beijing this week.
The nation needs about $1 trillion of its holdings for international payments purposes and should use the remainder to buy assets such as exploration rights for energy and resources, he said. China should also set up processing-trade zones overseas which could spur exports of parts and raw materials, he said.
--Zheng Lifei. Editor: Nerys Avery, John Liu
To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at email@example.com