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China’s forex reserves shrink for 4th month in a row

China’s foreign exchange reserves fell for a fourth month in a row in October as the value of the US dollar rose.

The reserves shrank by US$45.7 billion to US$3.121 trillion, the State Administration of Foreign Exchange said on Monday.

The decline was well above a Bloomberg consensus forecast of US$33.9 billion and bigger than those of the previous three months. Forex reserves shrank by US$18.8 billion in September, US$15.89 billion in August and US$4.1 billion in July.

Capital Economics China economist Julian Evans-Pritchard said the decline had “more to do with valuation effects than increased intervention”.

“Capital outflows remain substantial but probably eased last month,” Evans-Pritchard said.

The value of the US dollar against a basket of currencies rose 3.12 per cent in October, leading to a large valuation loss of non-US dollar denominated assets in China’s forex basket. The yuan fell 1.39 per cent against the US dollar last month alone.

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There are signs that the People’s Bank of China, the country’s central bank, temporarily eased its foreign exchange intervention last month.

Net capital outflows also declined slightly last month from US$59 billion in September.

But Evans-Pritchard warned that “a further slide in the Chinese currency against a globally strong dollar may cause capital outflows to accelerate again”.

Many economists have forecast further weakening in the yuan.

Tim Condon, chief Asia economist of ING, said the yuan could hit a low of 7.00 against the US dollar in the second quarter of next year.

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

The offshore yuan traded at 6.7870 against the US dollar as of 6.15pm on Monday, up 0.2 per cent, while onshore trading closed before the data release, with the rate lower at 6.7758.

The country’s forex reserves have shrunk 6.3 per cent this year as China struggles to control capital outflows and ensure a steady, rather than radical, yuan depreciation.

China’s reserves, the largest in the world, fell by a record US$513 billion last year after Beijing devalued the yuan, sparking capital outflows that threatened to destabilise the economy and alarmed global financial markets.