China’s bid to halt yuan’s fall sees biggest decline in forex reserves

CHINA’S foreign exchange reserves posted their biggest monthly fall on record in August, reflecting Beijing’s attempts to halt a slide in the yuan and stabilize financial markets following its surprise move to devalue the currency last month.

China’s reserves, the world’s largest, fell by US$93.9 billion last month to US$3.557 trillion, central bank data showed yesterday.

The drop left market watchers questioning how sustainable China’s efforts to support the yuan are, as capital flows out of the country due to fears of an economic slowdown and prospects of rising US interest rates.

“Frequent intervention will burn foreign reserves rapidly and tighten the onshore market liquidity,” said Zhou Hao, senior economist at Commerzbank in Singapore.

The offshore yuan weakened following the data release to trade at a record discount to the onshore rate, suggesting investors believe the official rate is being kept too high.

There was relief, though, that the dip in reserves had not been larger, with some commentators predicting in the run-up to the announcement that the drop could be as much as US$200 billion.

Still, economists estimated that the fall was probably slightly above the US$94 billion figure, given the positive impact of valuation changes as the dollar fell against major currencies. A large portion of China’s reserves are held in US Treasuries.

The decline in reserves has quickened following China’s near 2 percent devaluation of the yuan on August 11, which stoked fresh concerns about the economy and heavy selling of the currency.

China was so surprised by the reaction to the devaluation that it is likely to keep the yuan on a tight leash in the near-term to head off fears of a global currency war, policy insiders have said…Read more

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