The RBA just warned China is going to have trouble keeping its currency stable

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The Reserve Bank of Australia has warned that it will be difficult for China to maintain stability in its currency.

In its quarterly statement on monetary policy released earlier today, the RBA said “it is likely to be difficult to maintain stability of the renminbi, given the magnitude of private capital outflows.”

The decision by the PBOC to allow market forces to play a greater role in determining the renminbi’s value – something that was announced suddenly in mid-August 2015 when the bank unexpectedly weakened the currency weakened by 2% against the U.S. dollar – has seen expectations for further depreciation grow, leading to substantial capital outflows from the nation.

“The value of the PBOC’s foreign currency reserves decreased by US$183 billion over the December quarter, and by US$108 billion in the month of December,” said the RBA.

“This reflected large net private capital outflows, which have been mainly driven by Chinese residents responding to expectations for RMB depreciation by, for example, paying down their foreign currency-denominated liabilities. The PBOC’s foreign currency reserves decreased by US$513 billion (or 13 per cent) over 2015 to US$3.3 trillion, and are US$663 billion below their peak in June 2014.”

While the move from the PBOC saw the renminbi admitted to the IMF’s special drawing rights (SDR) basket – which it was clearly pushing for by making the decision – as the chart below reveals, allowing market forces to play a greater role in determining the renminbi’s value has not come cheap, particularly given mounting concerns over the outlook for the economy.

China’s FX reserves have fallen in each of the past six quarters, with the decline accelerating over recent months as capital outflows from the nation swelled.

We get an update on the status of those FX reserves soon, probably this weekend. Traders will be watching.

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