China FX Reserves Drop Most Since January as Pressures Build

(Bloomberg) -- The world's largest foreign currency hoard tumbled the most since January as a stronger dollar helped spur capital outflow pressures and shaved the value of the stockpile.

Key Points

• Reserves decreased $45.7 billion to $3.12 trillion in October, the People's Bank of China said in a statement Monday 
• That compares with the median forecast of $3.13 trillion in a Bloomberg survey of economists, and a record $4 trillion of holdings in June 2014

Big Picture

The data come amid a period of renewed weakness for China's currency. The yuan fell 1.53 percent last month, the most since a devaluation in August last year that shook investor confidence and ignited global market turmoil. Policy makers were suspected of propping up the exchange rate in the weeks leading up to a Group of 20 meeting in September and before the yuan's entry into the International Monetary Fund's reserves on Oct. 1 -- and then reducing support after exports plunged the most in seven months. The currency fell to a six-year low of 6.7856 a dollar on Oct. 28.

Economist Takeaways

“The yuan was sprinting all the way to approach 6.8 in October, which may have prompted the PBOC to sell some reserves to stabilize the market," said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. "Capital outflows will continue, the only questions is how fast, and that depends on the dollar's move."

"Capital outflow pressures will be sustained at least for the coming months," said Frederik Kunze, chief China economist at Norddeutsche Landesbank in Hanover, Germany. "Growing anxiety with regard to the soundness of the Chinese financial markets and the fear of a property bubble have to be seen in this context."

"The drop is in fact milder than most people thought, which suggests that the PBOC isn't burning reserves to underpin the yuan's exchange rate," said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. "It may show that the Chinese central bank is more tolerant of volatility in its currency."

"The number indicates relatively light intervention by PBOC during the month," said Ding Shuang, head of Greater China economic research at Standard Chartered Plc. in Hong Kong. Most of the drop comes from valuation effects, he said.

Faster yuan depreciation against the dollar, higher interbank interest rates, and PBOC liquidity injections via open market operations "pointed to continued capital outflows in October," said Robin Xing, an economist at Morgan Stanley in Hong Kong.

The Details

• Nearly $30 billion of the decrease was due to valuation effects, and central bank intervention accounted for only about $10 billion to $15 billion, according to Yao Wei, a China economist at Societe Generale SA in Paris
• The hoard edged up in terms of IMF Special Drawing Rights to $2.271 trillion in October from $2.268 trillion in September
  
  

--With assistance from Tian Chen To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net, Miao Han in Beijing at mhan22@bloomberg.net. To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns, Robin Ganguly

With assistance from Xiaoqing Pi, Miao Han