China Sept forex reserves fall more than expected as PBOC steadies yuan

[SHANGHAI] China's foreign exchange reserves fell for a third straight month in September and by slightly more than markets had expected, suggesting fresh capital outflows from the world's second-largest economy.

Forex reserves fell nearly US$19 billion to US$3.166 trillion, from US$3.185 trillion in August, central bank data showed on Friday.

Economists polled by Reuters had expected reserves to ease to US$3.18 trillion, after dropping to the lowest since 2011 in August after the central bank intervened to support the yuan currency as it weakened to near six-year lows.

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

But declines had slowed sharply in the first half of this year as authorities tightened capital controls and cracked down on forex trading which they suspected to be speculation.

Tentative signs of stabilisation in the economy and investment inflows were also believed to be offsetting outflow pressures.

However, while September's US$18.8 billion drop was modest compared with overall reserves, it was larger than a decline of US$15.89 billion in August and the biggest in three months.

"It's almost US$20 billion, which is quite a considerable fall," said Julian Evans-Pritchard, China economist at Capital Economics, adding the impact of exchange rates and bond market movements meant the real figure was probably even higher.

"I think there is still quite significant intervention in the currency markets by the PBOC and I think today's data highlights that."

China was potentially even more vulnerable than last year to a large rise in capital outflows that would hit currency markets, he added.

"There is still definitely some vulnerability on the capital flows side, and obviously that has implications for the currency. Any big pick-up in capital outflows is going to put downward pressure on the renminbi."

Traders believe the People's Bank of China (PBOC) has stepped in via state-run banks since July to slow the pace of depreciation in the yuan, which has weakened 2.7 per cent against the US dollar so far this year.

China is believed to have wanted stability in the currency ahead of two high-profile global events: its hosting of a G20 leaders summit in September and the yuan's inclusion in the International Monetary Fund's basket of reserve currencies from Oct 1.

But most market watchers expect the central bank will allow the yuan to resume its gradual descent later this year, especially if the chances of a US interest rate hike are seen rising, buoying the US dollar.

The yuan is expected to fall another 3 per cent by next September, according to a Reuters poll of more than 70 foreign exchange strategists issued on Thursday.

Regulators will continue to crack down on forex violations and strengthen monitoring of cross-border capital flows, the State Administration of Foreign Exchange (Safe) said last month, adding that it will also push forward to achieve capital account convertibility in an orderly manner.

China's gold reserves rose to US$78.169 billion at the end of September, from US$77.18 billion the previous month.

REUTERS