December 22, 2008 / 4:34 AM / 11 years ago

UPDATE 2-China FX reserves fall in Oct, first time since '03

(Adds further reaction)

BEIJING, Dec 22 (Reuters) - China’s foreign exchange reserves, the world’s largest stockpile, shrank in October to less than $1.89 trillion, their first monthly fall since December 2003, a source familiar with the situation said on Monday.

The reserves stood at $1.906 trillion at the end of September, the last date for which official figures have been reported, meaning they fell by at least $16 billion during October.

The source, who wished not to be identified, declined to say whether the reserves continued to fall in November. The only other month since the start of 2000 during which the reserves fell was Dec. 2003.

Cai Qiusheng, an official with the State Administration of Foreign Exchange (SAFE), acknowledged in a speech on Saturday that the reserves had fallen from their level above $1.9 trillion, but gave no further details on the extent or timing of the fall.

A moderate easing in the reserves’ accumulation was what authorities had long been hoping for, Cai noted, according to a transcript of the remarks published on the web portal Sina.com.

Most economists were relatively sanguine about the fall in the reserves, which Beijing has long been hoping would start to flatten.

“It would do China no harm at all if FX reserves fell. China is extraordinarily well positioned in terms of import cover, in terms of its coverage of external debt,” said Stephen Green with Standard Chartered in Shanghai.

More important was that the current account surplus start to come into better balance, Green said, to ease China’s imbalances with the rest of the world.

China’s trade surplus hit consecutive record highs in October and November, of $35.2 billion and $40.1 billion respectively, as the slowdown in import growth outpaced that of exports.

SENTIMENT SHIFT?

Economists said lack of transparency about the nature of capital flows in China made it just as hard to to explain the fall in October as it had been to account for stunning rises earlier in the year.

They listed a range of possible reasons behind the fall. One was that export firms and banks could be choosing to hold more dollars given their broad strength through November, another that more Chinese investments overseas could have been booked during that time.

Some economists cautioned, however, that it could also signal a potentially worrying reversal in capital flows.

A fall in the reserves would mark a drastic contrast to their rapid accumulation over the past few years, as the central bank, in an effort to keep the yuan CNY=CFXS stable, has bought up many of the dollars coming into the country through the large trade surplus and inflows of foreign investment.

The reserves rose by $280.6 billion in the first half of 2008 to $1.809 trillion. For all of 2007, they rose by $461.9 billion, compared with an increase of $247.3 billion in 2006.

At least part of those increases were thought to result from inflows of speculative capital betting on further yuan gains.

However, the Chinese currency has weakened against the dollar in the past few months, prompting speculation that some hot money was leaving the country.

In the third quarter of 2008, the last period for which figures are available, the reserves increased by less than the sum of the country’s trade surplus and foreign direct investment inflows during that period — a very rough indication of whether the country has witnessed capital inflows or outflows.

SAFE’s Cai hinted at such a development in his remarks on the reserve fall.

“It also reflects a change in confidence, a change in the market, and we have already seen a big swing in the yuan exchange rate.”

But Fang Sihai, an economist with Hongyuan Securities in Beijing, cautioned against reading too much into the fall in the forex reserves.

“There may be some foreign investors trying to get cash back home because of the financial crisis, but I don’t think there will be massive capital outflows,” Fang said.

“The reason could also be increased Chinese investment in overseas markets.” (Editing by Tomasz Janowski) (Reporting by Beijing newsroom, Writing by Jason Subler)

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