China's foreign exchange reserves will likely decrease through the first half of 2009 because of a weakening yuan, economists said.

Speculation of a weaker yuan in the near term will be the main cause of the fall in China's foreign exchange reserves, said Sherman Chan, an economist at Moody's Economy.com, yesterday in a report.

As the yuan is expected to at most maintain its current value during the first half of next year, reflecting the government's stimulus policy, chances are high that the country's foreign reserves will further drop going into 2009, Chan said.

The yuan has been flat since the middle of the year. Chinese exports have been hit hard by a stronger yuan and declining demand from Western markets since the financial meltdown.

Although the official figures for the fourth quarter are yet to be released, a State Administration of Foreign Exchange official said earlier this month that China's foreign exchange holdings are now below US$1.9 trillion that the nation held at the end of September.

"China's trade surpluses continued to hit record highs in recent months, indicating that capital inflows should have remained robust," Chan said.

"Moreover, foreign direct investment inflows, albeit a lot slower than a year ago, should also have continued to add to the country's foreign reserves. However, the yuan has depreciated, or at least stopped appreciating, which has possibly led to outflows of speculative capital and also encouraged domestic firms to hoard earnings in US dollars," he said.

The view is echoed by Lu Zhengwei, an Industrial Bank chief economist, who said companies or individuals may hoard greenbacks for short-term speculation on bets that the yuan will keep weakening. He said a sharp depreciation of the yuan will dampen such speculative activities.

China has been the world's largest foreign reserves holder since early 2006. Chan said the recent decline will not change its position as Japan, the second-largest holder, possesses much smaller reserves of around US$1 trillion.

(Shanghai Daily December 31, 2008)