China's forex reserves drop on RMB intervention, capital outflow

China's forex reserves drop on RMB intervention, capital outflow

Staff Reporter 2015-09-10 

 

China's state media have denied that the government sold off US dollar assets to prop up the renminbi. (File photo/CFP)

China's foreign exchange reserves have been on the slide since June 2014 when they peaked at US$3.99 trillion. The reserves fell by US$93.9 billion to US$3.56 trillion at the end of August, the biggest monthly drop in terms of both amount and percentage since May 2012, according to data released Sept. 7 by the People's Bank of China, the country's central bank.

The country's state-run media however have denied international media reports that the central bank has been selling US dollar assets to prop up the weakening renminbi, the Chinese-language Economic Observer reported.

According to the official line, there is no reason to expect a long-term depreciation of the renminbi and the currency will remain strong, the report said.

PBOC governor Zhou Xiaochuan was cited as saying that China's economic fundamentals remain unchanged despite the recent devaluation in the renminbi and stock market plunge and that the country still has a relatively large foreign trade surplus. There is therefore no reason to expect a long-term depreciation of the yuan, Zhou said at the recent meeting of G20 finance ministers and central bank governors in Ankara.

The Economic Observer report said the central bank should be cautious about the effects of the falling forex reserves on the country, as they help bolster the renminbi. But as long as the central bank continues to intervene in the market to prop up the yuan, the country's forex reserves will continue to shrink, the report said.

There are several reasons China's forex reserves plunged by US$93.9 billion last month. The first reason is the massive outflow of capital from the country. Julian Evans-Prichard, China economist at Capital Economics, calculated that around US$130 billion worth of funds were moved out of China in August, a sharp increase from the US$75 billion outflow that he estimated for July, according to a Wall Street Journal report.

Second, the PBOC has been directly intervening in the currency market, buying renminbi and selling US dollar assets to prevent the yuan from falling too much. Analysts from Deutsche Bank estimate that the central bank spent up to US$50 billion on interventions on Aug. 12, 26 and 28, according to the WSJ report.

In addition, changes in valuation and investment may also be responsible for the fall in forex reserves, according to the Economic Observer.

China's forex reserves of US$3.56 trillion as of the end of August were still by far the largest in the world. Experts estimate that forex reserves of US$800 billion-$1 trillion would be enough to stabilize China's currency, according to the Economic Observer report.

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