Foreign Exchange Reserves in China Drops to its Lowest Level in Three Years

Foreign Exchange Reserves in China Drops to its Lowest Level in Three YearsIn January, the foreign-exchange reserves of China dropped to its lowest level in three years. This has raised questions regarding the length of time that Beijing can carry on burning its internal funds to protect the yuan without setting off a vast flight of capital.

On Sunday, the People's Bank of China said that the largest stockpile of foreign currency in the world dropped by $99.5 billion in January to $3.23 trillion. The slip came after a record $107.9 billion drop last year in December. The decline actually sped up in August, a time when the exchange-rate policies of China seemed to be heading for instability.

Last year in August, the central bank of China suddenly devalued the yuan but it did not work out the way the Country planned and the action backfired. Panicked investors sold yuan which forced the central bank to hollow out into its reserves to calm down the worries.

The Chinese central bank is already finding itself in a vicious cycle. The more it draws on the reserves trying to perk up the yuan, the investors' doubts increase regarding the country's ability to maintain the currency's stability which in turn makes added money to depart the country.

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