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

The offshore yuan traded at a nine-month low on Friday after data showed China’s foreign exchange reserves dropped for the third month in a row in September and at a faster rate than market expectations.

The mainland’s forex reserves, the world’s largest, shrank by US$18.8 billion to about US$3.166 trillion last month, according to data from the State Administration of Foreign Exchange.

Total reserves fell to below the US$3.18 trillion expected by economists polled by Reuters and Bloomberg.

September’s 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 three months.

The yuan, as traded in Hong Kong, was little changed for the day at 6.7080 to the US dollar as of 4.51pm on Friday. The currency dropped to 6.7182 earlier, the lowest since January 7 and near the weakest closing level since September 2010.

The onshore currency finished last Friday at 6.6745, while the gap between the two rates increased to as much as 0.6 per cent, the widest since June.

Mainland traders return from a week-long holiday on Monday.

Analysts said the bigger-than-expected fall in foreign reserves likely reflected the central bank’s determination to manage the 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 its inclusion in the International Monetary Fund’s Special Drawing Rights basket of major currencies on October 1. The yuan was given the third-largest weight, with other currencies including the US dollar, the euro, the yen and the pound.

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

“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.

“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, the yuan has depreciated 2.7 per cent against the US dollar.

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

But, 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.

Central bank deputy governor Yi Gang said on Thursday that the country’s economy was operating with greater stability than in the past and was growing at a speed of between 6.5 per cent and 7 per cent.

Additional reporting by Bloomberg