To cope with the effects of the economic slowdown, the Chinese government has cashed in on its vast foreign exchange reserves to rescue the falling currency and curtail capital outflow overseas.

As a result, Chinese forex reserves have depreciated by a whopping $420 billion over the last 6 months and currently stands at US$3.23 trillion, which is its lowest level since May 2012.

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At US$3.23 trillion, however, China still owns the largest foreign exchange reserves in the world. But some economists believe that the fast depreciation of the forex reserve is unhealthy and unsustainable.

"The mathematics around this rapid pace of depletion in recent months is simply unsustainable for any length of time," Rajiv Biswas, Asia Pacific Chief Economist, IHS Global Insight said to a leading news publication.

The overall consensus among leading economists is that stability of Yuan and the level of the People's Bank of China's involvement in the currency market will be critical for China's forex reserves.       

Meanwhile, officials in the People's Bank of China - according to sources - have clearly ruled out one-off sharp devaluation of Yuan, as suggested by some economists and leading global monetary institutions.     

As per highly placed sources, the People's Bank of China considers sharp devaluation of Yuan against China's economic interest, as it would undermine ITS purchasing power.           

Leading monetary institutions like the International Monetary Fund (IMF), however, have urged Beijing to adopt a better communication strategy to stem volatile Yuan and capital outflow.

In response, the People's Bank of China has said that it will get rid of non-cohesive monetary policies and will adopt clearer communication to weed out confusion among investors.   

TagsChinese Economy, yuan, Chinese Foreign Exchange Reserves