Drop in China’s reserves suggests $34bn move to protect renminbi
The yuan fell 1.5% against the dollar in October, its seventh straight monthly loss
Beijing — China’s foreign exchange reserves fell more than expected to an 18-month low in October amid rising US trade frictions, suggesting authorities may be slowly stepping up interventions to keep the yuan from breaking through a key support level.
Reserves fell by $33.93bn in October to $3.053-trillion, central bank data showed on Wednesday.
The drop was the biggest monthly decline since December 2016, and compared with a fall of $22.69bn in September.
Economists polled by Reuters had expected reserves to drop $27bn to $3.06-trillion.
China’s foreign exchange regulator attributed the fall to adjustments in global asset prices and currency valuation effects caused by a 2.1% rise in the dollar index.
Net foreign exchange sales by China’s commercial banks are likely to be about $3bn in October, a drop of more than 80% from September, the State Administration of Foreign Exchange said in a statement.
The yuan slipped closer to the psychologically important level of 7/$ in late October — a level last seen during the global financial crisis — though it has clawed back some losses in recent sessions on hopes that Sino-US trade tensions may ease.
The yuan fell 1.5% against the dollar in October, its seventh straight monthly loss.
Policy sources have told Reuters that China is likely to use its vast reserves to stop any precipitous fall through the 7 level as it could risk triggering heavy capital outflows.
Recent Chinese data have pointed to rising outflows. But so far there have been no signs of a widespread flight of funds like that in 2015, due largely to capital controls put in place since then.
Sales of net foreign exchanges by Chinese commercial banks rose to the highest in September since June 2017.
Capital Economics, in a note to clients after the latest data, estimated that the PBOC sold about $14b n of reserves last month, after $17b n in September.
“Its intervention remains small in scale and seems calibrated to slow the renminbi’s fall rather than stop it.”
The yuan, which has lost just over 6% of its value to the dollar so far this year, is expected to weaken further as authorities ease policy to support the slowing economy. That could see Beijing use up more reserves to prevent any steep declines in the currency which could rattle global financial markets and draw more criticism from Washington.
“Given the weak growth outlook and the bias towards expansionary monetary and fiscal policies, we see the renminbi under depreciation pressure,” Zhou Hao, senior emerging market economist at Commerzbank in Singapore, said in a note.
A recent Reuters poll showed that short bets on the Chinese yuan rose to their highest since early August against the backdrop of slowing domestic and external demand for China’s products.
Economists at ING believe the yuan will cross 7 between now and the end of the year, especially if a meeting between Presidents Donald Trump and Xi Jinping at the G20 later this month shows no progress in defusing the trade war. ING expects the yuan could weaken further to 7.3 by the end of 2019.
The value of China’s gold reserves rose to $71.968bn at the end of October, from $70.327bn at the end of September.