China’s Central Bank, the People’s Bank of China (PBOC), will be forced to refrain from supporting the nation’s currency — the yuan — by early December and allow for the currency to decline, due to a strain on its foreign exchange reserves, according to Rabobank, Bloomberg reports.
China will have to keep at least $2.7 trillion of reserves available in order to avoid any potential shortfalls, as it needs around $1 trillion to pay for six months of goods imports and $1.7 trillion to pay for external debt, according to Rabobank.
China’s stockpile of foreign currency reserves will shrink by $40 billion a month for the rest of 2015, in part due to efforts to prop up the yuan, according to a Bloomberg.
“The pile may already have dropped by as much as $200 billion in the last few weeks of August,” said Michael Every, head of financial markets research at Rabobank in Hong Kong.
China’s yuan will decline to 7 against the U.S. dollar by the end of this year, from about 6.4 now, according to Every.
“In 2016, if China’s economic fundamentals do not improve and the U.S. continues to tighten monetary policy, then a further slide to as far as 7.50 and beyond is not out of the question,” he added.
China’s foreign exchange reserves, which are the world’s largest, have fallen $315 billion on the year through July to $3.65 trillion, according to Bloomberg, whom estimates that each 1 percent drop in the yuan is triggering around $40 billion of outflows.