September 7, 2018 / 9:38 AM / 17 days ago

China August FX reserves fall slightly more than expected to $3.11 trillion

BEIJING (Reuters) - China’s foreign exchange reserves fell slightly more than expected in August as the dollar extended gains and Beijing took steps to stabilize its yuan currency in the face of mounting trade tensions with the United States.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

Reserves fell $8.23 billion in August to $3.11 trillion, compared with a rise of $5.82 billion in July, data from the People’s Bank of China (PBOC) showed on Friday.

Economists polled by Reuters had expected a drop of $6.95 billion to $3.111 trillion.

Trade frictions, geopolitical and economic uncertainties and valuation changes due to the rising dollar index all contributed to the decline in reserves, China’s foreign exchange regulator said in a statement.

The yuan weakened for the fifth straight month in August as the dollar remained buoyant, raising concerns that Beijing may be considering a stealth devaluation to support its exporters as the Sino-U.S. trade war heated up.

In August, the yuan fell nearly 0.2 percent against the dollar. The dollar index .DXY that measures it against other major currencies rose 0.7 percent.

But the yuan clawed back a bit of ground later in the month after a series of moves by China’s central bank signaled that it was not comfortable with further losses.

Julian Evans-Pritchard at Capital Economics said the PBOC’s reluctance to use its FX reserves to support the yuan showed it had leant a lesson from 2015-16, when its interventions failed to stem rapid falls in reserves.

“FX sales also leave the central bank open to accusations of currency manipulation, even if it is acting to prop up the currency not weaken it,” Evans-Pritchard said in a note.

“Perhaps more importantly, the PBOC appears to have fine-tuned the art of guiding the currency in less obvious ways, leaning on state banks to help offset private capital outflows and stabilize the exchange rate.”

In recent weeks the People’s Bank of China (PBOC) has closed loopholes that could be used for capital flight, made it more expensive for speculators to bet against the yuan and re-activated a mysterious “counter-cyclical” factor in its daily official guidance rate calculations to reduce volatility.

But analysts say the central bank may have to decide soon whether to intervene more forcefully to support the currency as the United States readies more sweeping tariffs on Chinese goods.

President Donald Trump’s administration could impose levies on $200 billion more of Chinese goods after a public comment period ended on Thursday, and the tariffs could go into effect soon afterward.

“The renminbi’s recent depreciation will offset much of the (economic) impact of the tariffs proposed so far. But a further escalation of the trade conflict with the U.S. would clearly be a concern,” Capital Economics said in a note on Thursday.

CAPITAL CONTROLS A SOLID FIREWALL

Despite the yuan’s steady depreciation in recent months, there have been few signs so far of a spike in capital outflows like those seen a few years ago after a surprise devaluation by the PBOC.

Most currency strategists polled by Reuters this week predict only a small gain for the yuan over the next 12 months as policymakers draw a line in the sand, but a significant minority believe authorities could let the currency weaken again if global trade conditions worsen.

Controls on capital flows that China imposed in 2016 and 2017 also seem to have helped prevent a recurrence of the volatility seen then, when Beijing unsuccessfully burned through a trillion dollars worth of FX reserves to try and contain the yuan’s fall and stem capital flight.

The value of China’s gold reserves fell to $71.228 billion at the end of August, from $72.324 billion at the end of July.

Reporting by Kevin Yao and Cheng Fang; Editing by Kim Coghill

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