China forex reserves in record fall as Beijing tries to calm markets

Mon Sep 7, 2015 11:06am EDT
 
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By Nathaniel Taplin and Kevin Yao

SHANGHAI/BEIJING (Reuters) - 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 $93.9 billion last month to $3.557 trillion, central bank data showed on Monday.

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 U.S. 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 $200 billion.

The decline in reserves has quickened following China's near 2 percent devaluation of the yuan on Aug. 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 told Reuters.   Continued...

 
An investor stands in front of an electronic board showing stock information at a brokerage house in Shanghai, China, September 2, 2015.  REUTERS/China Daily