China Draws Down Reserves To Keep Renminbi Afloat

FX Reserves | China’s foreign exchange reserves plunged by nearly $94 billion in August, the most ever in a single month, as the People’s Bank of China (PBoC) struggled to support the renminbi after devaluing the currency by 1.9%.

After peaking just shy of $4 trillion in June 2014, China’s reserves have fallen by $436 billion, in part reflecting the decline of the euro, according to Khoon Goh, senior foreign exchange strategist at ANZ in Singapore. He estimates that as much as a quarter of China’s reserves are held in euros.

The decline in reserves in August, when the euro was rising, does not fully convey the extent of intervention by the PBoC, Goh says. “We suspect that intervention was also done in the FX forwards market,” he says.

China’s reserve adequacy has declined in recent years and now stands in the middle of the International Monetary Fund’s suggested range. Further current-account liberalization could see capital outflows increase if depreciation expectations remain, Goh says. However, the more the PBoC intervenes to support the renminbi, the eventual downward adjustment risks being much larger, he says.