China’s forex reserves fall more than expected in September, by US$18.8b

China’s foreign exchange reserves have dropped for the third month in a row, with September’s data showing the latest fall has exceeded market expectations as the central bank continues its ongoing efforts to defend the yuan’s exchange rate.

The nation’s forex reserves, the world’s largest, shrank to about US$3.166 trillion last month – down from US$3.185 trillion in August, according to data from the state administration of foreign exchange.

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This is below the estimated fall to US$3.18 trillion by economists polled by Reuters and Bloomberg.

September’s US$18.8 billion drop was small compared with overall reserves, but it was larger than a decline of US$15.89 billion in August and was the biggest in four months, according to Reuters.

Analysts said the larger-than-expected fall was likely to indicate the determination of the People’s Bank of China (PBOC) to manage yuan’s weakness and keep its exchange rate steady as it seeks to internationalise its currency.

The latest sign of the yuan’s internationalisation was the inclusion of yuan in the International Monetary Fund’s Special Drawing Right basket of major currencies, including the US dollar, the euro, the yen and the British pound, on October 1, which saw it given the third-largest weighting.

The weakening currency and falling reserves suggested the latest drop was a market-led move that largely reflecting financial outflows, such as many mainlanders coming to Hong Kong to buy insurance products, said Louis Kuijs, head of Asia Economics at Oxford Economics.

“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,” Kuijs said.

“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.

“[More importantly] Beijing doesn’t want those outflows to start living their own lives, with the outflows weakening the currency and then again leading to more people to move their money outside,” he said.

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“They want to control that process. There is a strong feeling among the authorities that if you let the currency weaken abruptly, it will trigger more outflows.”

So far this year, China’s currency has depreciated 2.7 per cent against the US dollar.

On Friday, the yuan exchange rate against the dollar in the offshore market weakened to its lowest level since January, while the onshore yuan market was still closed for the National Day holiday.

Depreciation pressure on the yuan increased significantly after China’s exchange rate reform in August last year, which led the central bank to sell reserves to prop up the yuan.

However, the decline in reserves slowed this year as Beijing tightened capital controls and cracked down on suspicious forex trading, and China’s economic growth turned better than expected.

Liao Qun, chief economist at China Citic Bank International, said market expectations about the yuan’s devaluation would depend on how stable China’s economy turned out to be.

Yi Gang, deputy governor of the PBOC, said at a panel on Thursday that China’s economy was running with greater stability than in the past and was growing at a speed of between 6.5 per cent and 7 per cent.