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Bloomberg, 08 Feb 2017
China has wiped out about a quarter of the world’s heftiest foreign-currency stockpile over the past 18 months in its quest to keep the yuan stable. According to Commerzbank AG, such intervention is futile.

Data Tuesday showed China’s foreign reserves slipped below $3 trillion in January, the first time they’ve breached that psychologically potent level in almost six years. Yet the experiences of some fellow BRICs show that drawing down the stockpile will probably have little effect on the currency’s long-term fate, Hao Zhou, Commerzbank’s Singapore-based senior emerging-markets economist, wrote in a research note late Tuesday.
While efforts by Russia and Brazil in recent years might have cushioned the blow of currency declines, they couldn’t change the market’s dynamics. In Russia’s case, a collapse in oil prices and the imposition of economic sanctions over the Crimea crisis proved more powerful drivers than the sale of a third of the country’s foreign-currency hoard between April 2013 and March 2015. The ruble fell more than 50 percent versus the dollar in the period.

Brazil similarly failed to arrest the real’s decline from the start of 2013 to the end of 2015, when its economy fell into what some termed an economic depression. The Latin America’s central bank used foreign currency swaps instead of tapping reserves to try and stem the real’s drop.

“At the end of the day, fundamentals are still the key factor,” Hao said.
“The yuan is under pressure to weaken due to the economy’s bumpy growth profile,” said Hao, who forecasts it will slip to 7.15 per dollar by the end of this year from current levels around 6.88. The yuan slumped 6.5 percent in 2016, its worst performance in more than 20 years.

Intervention “has not changed the market expectations over yuan exchange rates,” he said.