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China: Forex reserve surprised markets by falling less than expected – ING

FXStreet (Delhi) – Tim Condon, Chief Economist at ING, notes that End-September foreign exchange reserves surprised on the upside at US$3.514tr (consensus US$3.50tr) and with hot money flows driving reserve changes, the data are comforting following August’s record $93.9 billion decline.

Key Quotes

“We inferred from the imposition of the 20% reserve requirement on forward market transactions in early September that August’s near-triple-digit reserve loss was too much.”

“We think the PBOC’s objective is to restore a pre-811 degree of convergence between the onshore and offshore forward curves. We think the strategy is to stabilize the spot USDCNY fixing, intervene in the onshore and offshore markets to maintain USDCNY and USDCNH convergence and wait for the economic data to portray a recovering economy. As of September 30, the last trading day before the National Day Golden Week holiday, there was evidence that their strategy was bearing fruit.”

“The authorities’ last RRR cut took effect on September 6 and would have roughly sterilized the August decline in foreign reserves. We think the PBOC reacts to reserve outflows rather than anticipates them and will wait at least another month before to see whether outflows have necessitated another RRR cut. We remain of the view that there will be one more 50bp cut to 17.50% before year end (Bloomberg median 17.50%).”

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