The real reason to worry about China's forex reserves

CHINA'S giant foreign exchange hoard just got a bit smaller. A US$94 billion decline in August - the biggest absolute drop on record - shrank the country's reserves of US dollars and other currencies to US$3.56 trillion. The outflows have raised concerns about capital flight in the wake of China's botched devaluation. Yet the bigger risk is of a domestic squeeze.

For the world's second-largest economy, losing 2.6 per cent of its reserves in a single month is more than a blip. Indeed, the figure would have been larger but for the euro's recovery in August, which boosted the value of China's holdings of the European currency in dollar terms.

The best guess is that China spent well over US$100 billion defending its currency in the aftermath of the "one-off" shift in the yuan's value in mid-August.