Declining Trend in China’s Forex Reserves Continues In September

China’s foreign exchange reserves has dropped for the third straight month in September, worrying industry analysts as the decline was higher than expected. The sharp fall is being attributed to the Chinese central bank continuing to sell dollars to prop up the declining yuan

According to latest report, the country’s reserve went from US$3.185 trillion in August to US$3.166 trillion last month. The drop of US$18.8 billion is larger than the decline seen in August which was US$15.89 billion, the highest in four months. Market analysts have said that the falling reserves are an indication that the central bank, the People’s Bank of China (PBOC) is continuing its policy to sell dollars to stem the drop in yuan, triggered by changes in its currency policies including its pursuit of internationalization of the currency.

Zhao Yang, Nomura Holdings Inc.’s chief China economist observed that the drop was a result of both intervention by the PBOC and the outflow of capital. Louis Kuijs, head of Asia Economics at Oxford Economics agreed to some extent, saying that the latest drop in reserves was most probably due to market factors.

Financial Times

In a statement, Louis Kuijs said.

Over the past nine months, the market has become more bearish on China’s currency, and the authorities have allowed that market pressure to drive the currency weaker. But they are keen to manage this process. Therefore, at times they use reserves to smooth out the weakness of currency. And it looks like it has continued into September.

Kuijs however added that intervention by PBOC has occurred because the Chinse authorities are keen to ensure that the outflows don’t become unmanageable and result in the currency weakening indiscriminately and in people moving their assets outside the country. The yuan declined against the dollar to its lowest since January this week despite the PBOC’s efforts.

Several market observers have said that the central bank stepped up its intervention last month ahead of the Group of 20 meeting held in China and the inclusion of yuan into the International Monetary Fund’s Special Drawing Rights set of currencies. Liao Qun, chief economist at China Citic Bank International, observed that ultimately market estimates of the yuan’s strength depended on the stability of the country’s economy.

The signs of a slowdown of the Chinese economy has been putting pressure on capital flows which has resulted in the authorities clamping down on capital transfers from the country with a variety of restrictive measures.

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