China’s October forex reserves plummet to 18-month low

Drop in reserves suggests central bank intervention to slow fall of Chinese currency

China’s foreign exchange reserves fell more than expected to an 18-month low in October amid rising US trade frictions, suggesting authorities may be slowly stepping up interventions to keep the yuan from breaking through a key support level.

Reserves fell by $33.93 billion (Dh124.6 billion) in October to $3.053 trillion, central bank data showed yesterday.

The drop was the biggest monthly decline since December 2016, and compared with a fall of $22.69 billion in September.

Economists polled by Reuters had expected reserves to drop $27 billion to $3.06 trillion.

China’s foreign exchange regulator attributed the fall to adjustments in global asset prices and currency valuation effects caused by a 2.1 per cent rise in the dollar index.

Net foreign exchange sales by China’s commercial banks are likely to be around $3 billion in October, a drop of over 80 per cent from September, the State Administration of Foreign Exchange said in a statement.

The yuan slipped closer to the psychologically important level of 7 per dollar in late October — a level last seen during the global financial crisis — though it has clawed back some losses in recent sessions on hopes that SinoUS trade tensions may ease.

The yuan fell 1.5 per cent against the dollar in October, its seventh straight monthly loss.

Capital Economics, in a note to clients after the latest data, estimated that the PBOC sold around $14 billion of reserves last month, after $17 billion in September.

“Its intervention remains small in scale and seems calibrated to slow the renminbi’s fall rather than stop it.” The yuan, which has lost just over 6 per cent of its value to the dollar so far this year, is expected to weaken further as authorities ease policy to support the slowing economy. That could see Beijing use up more reserves to prevent any steep declines in the currency which could rattle global financial markets and draw more criticism from Washington.

“Given the weak growth outlook and the bias towards expansionary monetary and fiscal policies, we see the renminbi under depreciation pressure,” Zhou Hao, senior emerging market economist at Commerzbank in Singapore, said in a note. A recent Reuters poll showed that short bets on the Chinese yuan rose to their highest since early August against the backdrop of slowing domestic and external demand for China’s products.