China’s August FX reserves down to US$3.11tril

BEIJING: China’s foreign exchange (FX) reserves fell slightly more than expected in August as the US dollar extended gains and Beijing took steps to stabilise its yuan currency in the face of mounting trade tensions with the United States.

Reserves fell US$8.23bil in August to US$3.11 trillion, compared with a rise of US$5.82bil in July, data from the People’s Bank of China (PBoC) showed. Economists polled by Reuters had expected a drop of US$6.95bil to US$3.111 trillion.

Trade frictions, geopolitical and economic uncertainties and valuation changes due to the rising dollar index all contributed to the decline in reserves, China’s foreign exchange regulator said in a statement.

The yuan weakened for the fifth straight month in August as the dollar remained buoyant, raising concerns that Beijing may be considering a stealth devaluation to support its exporters as the Sino-US trade war heated up.

In August, the yuan fell nearly 0.2% against the dollar. The dollar index that measures it against other major currencies rose 0.7%.

But the yuan clawed back a bit of ground later in the month after a series of moves by China’s central bank signalled that it was not comfortable with further losses.

Julian Evans-Pritchard at Capital Economics said the PBoC’s reluctance to use its FX reserves to support the yuan showed it had learnt a lesson from 2015-2016, when its interventions failed to stem rapid falls in reserves.

“FX sales also leave the central bank open to accusations of currency manipulation, even if it is acting to prop up the currency not weaken it,” Evans-Pritchard said in a note.

“Perhaps more importantly, the PBoC appears to have fine-tuned the art of guiding the currency in less obvious ways, leaning on state banks to help offset private capital outflows and stabilise the exchange rate.”

In recent weeks, the (PBoC) has closed loopholes that could be used for capital flight, made it more expensive for speculators to bet against the yuan and re-activated a mysterious “counter-cyclical” factor in its daily official guidance rate calculations to reduce volatility.

But analysts say the central bank may have to decide soon whether to intervene more forcefully to support the currency as the United States readies more sweeping tariffs on Chinese goods.

President Donald Trump’s administration could impose levies on US$200bil more of Chinese goods after a public comment period ended on Thursday, and the tariffs could go into effect soon afterward.

“The yuan’s recent depreciation will offset much of the (economic) impact of the tariffs proposed so far. But a further escalation of the trade conflict with the US would clearly be a concern,” Capital Economics said in a note on Thursday. — Reuters