China forex reserves fall to lowest level since 2011

SHANGHAI: China's foreign exchange reserves fell to $3.19 trillion in May, the central bank said Tuesday, marking the lowest level since 2011 because of weakness in the yuan, which makes the currency less attractive to hold and also causes capital to flow out of the country.

The country's hard currency reserves -- still the world's largest -- fell by nearly $28 billion in May from the previous month, ending two months of gains, data from the People's Bank of China (PBoC) showed.

Bloomberg News said the drop was the largest in over four years.

Analysts attributed the fall to weakness in the yuan -- also known as the renminbi (RMB) -- on expectations of higher US interest rates.

"The value of China's foreign exchange reserves resumed its decline last month, as expected, following a fresh bout of renminbi weakness against the dollar and a small pick-up in net capital outflows," Capital Economics said in a research note.

Anticipating that the US may raise interest rates in June or July and cause the yuan to plunge against the dollar, China's central bank has already begun to allow the domestic currency to move lower.

It set the yuan at a more than five-year low against the US dollar on May 30, dragging the yuan down 1.86 percent against the greenback based on the daily fix.

China rattled global investors with a surprise devaluation last August, when it guided the normally stable yuan down nearly five percent over a week.

The move was largely perceived by analysts as an attempt to boost exports even as Beijing says it is seeking to transform its investment- and export-led economy to one more driven by consumer demand.

But Capital Economics said the recent weakness was a sign of the strengthening dollar on the back of a brighter outlook for the US economy.

"This depreciation reflects dollar strength rather than any attempt by the PBoC to devalue the renminbi," Capital Economics said.

It estimated net capital outflows of $32 billion in May, up from $26 billion in April.

"The pick-up in outflows appears to have been driven by a weakening of the renminbi against the dollar last month," it said.

In a sign that people are less willing to hold the Chinese currency, the yuan fell to sixth place from fifth as a global payments currency in April, trailing the Canadian dollar, according to SWIFT, the global provider of financial messaging services.