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Further fall in China forex reserves points to more renminbi support

OWoN: Supporting a currency value yourself is not the same as market demand by external capital flows, which suggests confidence is not as strong as some parties perceive. China is cranking up as the US is cracking up.

Further fall in China forex reserves points to more renminbi support

Financial Times
By Patti Waldmeir
and Patrick McGee
7 October 2015

China’s foreign exchange reserves fell another $43bn last month, suggesting continued intervention in the forex markets to support the renminbi.

However, the pace of capital outflow slowed compared with August, when reserves fell $94bn, the sharpest monthly fall on record, as the People’s Bank of China sold down some of its formidable stockpile to support its currency after the August 11 devaluation.

“The figure shows capital outflow continued but more slowly than last month,” said Ding Shuang, head of greater China economic research at Standard Chartered. “The government is trying to reassure the market that a large-scale renminbi devaluation won’t happen not only through words but also by action. We expect the intervention will generally slow down in the following months.”

The country’s forex reserves now stand at $3.514tn, the lowest since July 2013. Reserves have fallen by an average $36.5bn a month this year, with April the only month they grew.

Analysts on Wednesday said actual outflows could be worse than the headline figure suggests.

“As the PBoC also intervened in the forward market in the past month, the foreign reserves will likely plunge again when these forward contracts mature,” said Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore. “In addition, Chinese residents will likely purchase a large amount of foreign currency in October to repay credit card bills, as overseas travel hit a new record during the October Golden Week holidays.”

Ahead of the week-long holiday, which ends on Wednesday, state media forecast that the number of mainlanders taking overseas trips this year — and potentially needing to settle bills with foreign currency — would rise 11 per cent to 4m against the same time last year.

The PBoC in August devalued the renminbi and switched to a more market-oriented exchange rate regime, prompting a 2.6 per cent decline in the currency that month.

The central bank has been intervening in both the onshore and offshore markets to prevent the renminbi from falling too steeply, a strategy that drains reserves.

Driven by large trade surpluses, China’s reserves peaked at almost $4tn in June 2014. A fall of 12 per cent since then still leaves China with considerable firepower to prop up its currency.

Additional reporting by Jackie Cai


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