China’s foreign-exchange reserves fell by a record last month, as the central bank sold dollars to support the yuan after the biggest devaluation in two decades spurred bets on continued weakness.
The currency hoard declined by $93.9 billion to $3.56 trillion at the end of August, from $3.65 trillion a month earlier. Economists surveyed by Bloomberg had forecast a median $3.58 trillion. The yuan weakened in offshore trading and 10-year Treasury futures contracts fell after the data.
The reserves’ decline illustrates the cost to China as it props up its currency and seeks to stem an outflow of capital that threatens to deepen the nation’s economic slowdown. The shrinkage in reserves means less money flowing into the financial system, creating what Deutsche Bank AG (XETRA:DBKGn) strategists have termed “quantitative tightening.”
“If the central bank continues its intervention, China’s foreign-exchange reserves will continue to shrink — the heavier the intervention, the deeper the fall,” said Li Miaoxian, a Beijing-based analyst at Bocom International Holdings. While the People’s Bank of China is trying to talk up the yuan exchange rate, it’s “inevitable” the nation will see continuous capital outflows and yuan depreciation pressure in the coming months.
Yuan Pares Some Gains
The offshore yuan traded in Hong Kong erased gains after the reserves figures were announced. It was trading down 0.2 percent at 6.4827 a dollar as of 6:07 p.m. local time. Ten-year Treasury futures contracts fell 10/32, or $3.13 per $1,000 face amount, to 127 15/32.
Chinese officials telegraphed confidence in the economy’s underlying solidity, predicting a stabilization in stocks and the currency at a gathering of Group of 20 finance chiefs Friday and Saturday. The G-20, meeting in Ankara, pledged to avoid tit-for-tat currency devaluations; the U.S. Treasury chief separately said that China should avoid persistent exchange-rate misalignments.
The biggest drop in China’s currency in 21 years last month spurred concern that a weaker yuan will hurt countries exporting to China.
Reserves Triple
China’s reserves more than tripled in the past decade, as the PBOC bought dollars to slow the yuan’s appreciation amid a swelling trade surplus. To ensure the influx of money didn’t spur a surge in inflation, the central bank raised the required reserve ratio for banks. With reserves now in reverse, the central bank has lowered reserve requirements, with economists forecasting further reductions.
Expectations that the U.S. will increase interest rates for the first time since 2006 this year are also luring funds from China, which has been loosening monetary policy since November.
“The hope for the PBOC, we believe, is that extreme selling pressure on the yuan subsides and they can allow a moderate depreciation to restore export competitiveness,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. “The fear is that today’s data will reinforce the market view that the only way for the yuan to go is down, and further accelerate capital outflows.”
A sustained shift from buying to selling from China would add pressure for Treasury yields to rise, the analysts wrote.
“The central bank won’t be so stupid to let its foreign-exchange reserves shrink by $100 billion every month,” said Li Jie, head of the foreign-exchange reserve research center at the Central University of Finance and Economics in Beijing. “If the market really wants the yuan to weaken, the PBOC may say ‘ok, let it be’ and reduce its intervention.”