Economists expected China’s reserves to fall by around $33 bln in November. Instead, they fell by a little more than $87 bln. This is the third largest decline it has recorded, and a little below the $94 bln drop reported in August.

China’s reserves peaked in June 2014 near $3.993 trillion. At the end of November, they were just above $3.438 trillion, which is essentially where they stood in October 2014. What happened in November? 

There are two main considerations. The first is valuation. This is an important though often under-appreciated or overlooked entirely. The reserves are not simply a quantity of foreign assets that the central bank holds, but it is also a valuation. For reporting purposes, the foreign currency holdings are converted into dollars.  

The euro fell 4% in November. Although China has begun to adopt the IMF’s best practice about reporting its reserve holdings, it is not yet fully transparent. Assuming that China’s euro holdings matched the global share of allocated reserves (20.5% at the end of Q2), the depreciation of the euro alone accounted for an almost $29 bln decline in the value of China’s reserves. The change in the euro’s value accounts for a third of the decline in China’s reserve holding. 

In November, nearly all the reserve currencies depreciated against the dollar. The Swiss franc also fell 4%. Sterling lost 2.4%. The Canadian dollar slipped 2.1%, and the yen eased 2%. All told, it seems reasonable to assume that nearly half of the decline in China’s reserves may be traced to the vagaries of the foreign exchange market. 

That leads us to the second main consideration. Capital outflows.The yuan had strengthened in September and October following the devaluation in August.However, in November the yuan’s decline resumed. It fell 1.25% in November. And the gap between the onshore and offshore yuan (CNY and CNH) widened, spurring talk of official action.