China reserves seen dropping US$40b a month on yuan support

A Bloomberg survey showed that Yuan is seen weakening 1.6 per cent to 6.50 a US dollar in the remainder of 2015.
A Bloomberg survey showed that Yuan is seen weakening 1.6 per cent to 6.50 a US dollar in the remainder of 2015.PHOTO: AFP

BEIJING (BLOOMBERG) - China's foreign-exchange reserves are expected to drop by some US$40 billion (S$56.35 billion) a month as the central bank intervenes to support the yuan, a Bloomberg survey shows.

The holdings, the world's largest, will decline to US$3.45 trillion by year-end from US$3.65 trillion at the end of July, based on the median estimate of 28 strategists and traders surveyed following last week's surprise devaluation of the currency. The forecasts ranged from US$3 trillion to US$3.71 trillion.

The currency is seen weakening 1.6 per cent to 6.50 a US dollar in the remainder of 2015, the survey showed.

"The central bank will frequently intervene in the foreign-exchange market in the next three months as it needs to ensure the currency is stable," said Ken Peng, a strategist at Citigroup in Hong Kong, the world's biggest currency trader. "China will spend some of its foreign-exchange reserves to achieve that goal."

The People's Bank of China is limiting the yuan's depreciation to prevent an exodus of capital as it contends with the slowest economic growth in more than two decades. While that support is eating into the nation's foreign reserves, which fell US$192 billion in the last seven months, the holdings are still more than triple those of any other nation.

The monetary authority bought yuan via agent banks last week to stabilize the exchange rate after an Aug. 11 devaluation triggered the steepest slide in two decades. The PBOC, which had maintained a de facto peg of about 6.20 per dollar over the last four months, said Thursday there was no basis for depreciation to persist and it would step in to curb large fluctuations.

China's currency weakened 2.9 per cent to 6.3947 per dollar in the five trading days after the devaluation, including a 0.05 per cent decline on Monday. Yuan positions at the PBOC and financial institutions fell by the most on record in July, a sign capital outflows picked up and the central bank stepped up intervention to support the yuan.

"China has paid and will keep paying relatively significant costs to maintain the yuan's strength," including sacrificing exports and using foreign-exchange reserves, China Securities Co. analysts Huang Wentao and Zheng Lingyi said in comments on Aug. 11. "Economic fundamentals don't support a steady yuan."