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A clerk counts Chinese yuan and U.S. dollar banknotes at a branch of Bank of China in Taiyuan, Shanxi province, China in 2006.   © Reuters
China's Annual Congress

China struggles to plug its capital drain

Continued intervention in question as foreign reserves dip below $3 trillion

YUSHO CHO, Nikkei staff writer and KAZUKI KAGAYA, Nikkei senior staff writer | China

SHANGHAI/TOKYO -- Capital drain from China shows no signs of stopping as the country's economic uncertainties and narrowing interest rate gap with the U.S. fuel expectations of an increasingly weaker yuan. Businesses and individuals rushing to convert their assets into foreign currencies are only adding to the downward pressure on the yuan.

Hoping to prevent a steep fall in the currency, Chinese authorities are buying the yuan and selling the dollar in massive amounts, causing China's foreign reserves to fall below $3 trillion for the first time in almost six years. The conventional way to curb a currency's depreciation is through bold monetary tightening, such as a rate increase, but this could dent the economy. Chinese authorities cannot take the risk ahead of the Communist Party Congress, a twice-a-decade gathering to be held in the second half of this year.

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