BEIJING—China’s foreign-exchange reserves dropped below $3 trillion in January, the lowest level in almost six years, complicating the central bank’s balancing act of trying to contain asset bubbles without triggering a liquidity crunch.
The People’s Bank of China said Tuesday that the world’s largest stockpile of foreign currency fell $12.31 billion last month to $2.998 trillion. The decline was smaller than those seen in previous months, though economists polled by The Wall Street Journal had expected a mere $1 billion drop in light of the government’s heightened controls on money leaving China.
The larger-than-expected fall in reserves underscores the persistent pressure to move money out. One official who felt that was Shao Xueqian, who leads efforts to combat money laundering at a local bank in eastern China’s Zhejiang province. During the week long Lunar New Year holiday that ended Thursday, he said, “all my relatives were asking me about was how to transfer money out to buy property overseas.”
The continued outflows are challenging the central bank’s ability to juggle its conflicting goals of curbing bubbles and supporting growth. On one hand, it needs to tighten market liquidity to prevent excessive borrowing such as in the bond market, the latest financial arena to catch fire in an otherwise lackluster economy. On the other hand, money leaving China means banks have less cash to lend out, leading them to call for the central bank to pump in more liquidity.
In recent days, the PBOC has adopted a strategy of raising short-term borrowing costs for financial institutions to reduce the froth in the financial markets while leaving unchanged the benchmark policy rates used to price bank loans. At the same time, it has refrained from reducing the amount of money lenders must hold in reserve at the central bank, for fear that doing so could further pressure the yuan and worsen asset bubbles.
But with the outflows already draining money from the country, the stricter monetary bias risks causing a cash crunch, economists and analysts warn.
“China’s economic growth is not yet strong enough to warrant a monetary policy shift towards tightening,” said Chi Lo, China economist at BNP Paribas Investment Partners, the asset-management arm of the Paris-based bank.
By making it costlier for banks, brokerages and others to borrow from each other, the central bank is hoping to prompt big buyers of bonds to unwind their leveraged bets, thereby reining in excesses of the kind seen in China’s stock market before its 2015 crash. The move is in keeping with Beijing’s top economic priority this year, which is to fend off financial risks.
Officials at the central bank dismissed concerns that recent market-rate increases marked the beginning of a credit-tightening cycle, saying they were a result of both market forces and the central bank’s having stepped back its injections of liquidity. The officials acknowledged the need to combat bubbles in a range of markets including bonds and property, but stressed China’s monetary stance remains neutral.
The Chinese economy in recent months has shown signs of improvement as higher commodity prices have boosted industrial profits and some private businesses have regained appetite for investment. But overcapacity in sectors like steel and coal and the country’s high debt burden continue to drag down growth.
Capital flows have long been a key driver of China’s monetary policy. When money poured into the country between 2006 and 2011, the PBOC raised banks’ reserve-requirement ratio multiple times to mop up excess liquidity from the system. The trend reversed in 2014 and 2015, prompting the central bank to reduce the ratio several times to replenish funds drained by declining reserves. But since early last year, the PBOC has been reluctant to slash the ratio further so as not to send a too-strong easing signal that could further weaken the yuan and lead to more funds leaving China.
But if the central bank continues to push up market rates at a time of already-reduced liquidity levels, economists say, that will inevitably translate into higher funding costs for businesses, consumers and the like.
Economists at UBS Group AG say that China’s high debt levels—which they estimate reached 277% of its GDP as of the end of last year—should limit policy makers’ tolerance for higher interest rates, which would make it harder to pay off debts. Still, the economists say, the government’s desire to fend off bubbles likely will keep market rates elevated through this year.
—Liyan Qi contributed to this article.