China's forex reserves drop smaller than expected

China's foreign exchange reserves dropped by $99.5 billion from December to $3.23 trillion at end-January, the central bank said on Sunday.

The decrease was milder than a month-on-month decline of $108bn registered in December, which was the sharpest monthly fall on record, data from the People's Bank of China (PBOC) showed.

The drop in January was below market expectations of a $120bn fall, suggesting that the worst fears of cascading capital flight have not come to pass, said Tom Orlik, chief Asia economist at Bloomberg as quoted by state-run news agency, Xinhua .

China's forex reserves shrank by $512.7bn in 2015 as the country's currency was under increasing selling pressure after a revamp of the forex mechanism in August to make the currency's rate more market-based.

Yuan softening was also partly due to expectations of higher US interest rates and concerns over a slower Chinese economy, which led to capital flows outbound for higher returns.

However, the latest reserve data indicated the PBOC will be able to resist pressure for a disorderly depreciation, Orlik noted.

"The stock of reserves remains ample, enough to cover [capital] outflows at the current rate for more than two and a half years," Orlik said.

Despite the contraction, China's forex reserves remain the world's largest.

The country still has abundant forex reserves and a current account surplus, making it capable of withstanding the impact of cross-border capital flows, the State Administration of Foreign Exchange said.

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