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China: Under pressure on dipping Forex reserves – Rabobank

FXStreet (Delhi) – Michael Every, Research Analyst at Rabobank, notes that while Chinese FX reserves plummeted USD94bn in August, and as much as USD112bn adjusting for exchange-rate effects, in September the FX decline slowed to USD43bn, seeing total reserves slip to USD3,514bn, and so taken as a positive development by the market but that number still looks worrying.

Key Quotes

“A USD43bn pace of FX reserve decline suggests a net outflow of capital of around USD91bn in September, assuming that the trade surplus for the month is USD48bn, as the market expects. That would still make September the fourth-largest decline on record, after August’s USD154bn, September 2014’s USD112bn, and May 2012’s USD111bn. Moreover, we know that this decline occurred despite significantly tightened capital controls on the part of the Chinese authorities.”

“At the same time, even a USD43bn drop, if sustained, already means China is 17 months away from the critical USD2.8 trillion level reflecting the need to retain enough FX to cover 6 months of imports and its foreign debt. True, that is a long time in markets; however, unless there is a turnaround in the Chinese economy, the eventual end-game is still clear.”

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