China’s Foreign-Exchange Reserves Saw its Biggest Drop Since end-2016

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China’s foreign-exchange reserves recorded a monthly drop of US$33.93 billion in October, the biggest since December 2016.

The State Administration of Foreign Exchange said the drop was caused by the impact of a stronger US dollar on other assets.

October was already the third consecutive monthly drop, which was bigger than September's the US$22.7 billion decline, data from the Chinese central bank indicates.

While the country had its biggest foreign exchange reserve drop last month, it remains the world's largest at US $3.053 trillion.

Iris Pang, ING’s economist for Greater China said the October decline was small compared to 2015 when foreign-exchange reserves plunged more than US$100 billion in a month.

“This implies that there is no capital outflow panic in China even as USD/CNY approached 7.0, and depreciated 1.56% in the month,” she noted,.

The weakest closing level of CNY, also known as RMB (Renminbi), against the US dollar was 6.9757 on Oct 31.

ING: USD/CNY to hit 7.3 by end-2019

ING reiterated its view that the USD/CNY 7.0 handle is a mere round number instead of a “psychological barrier” as the currency pair has approached this level several times. 

“We expect that USD/CNY and USD/CNH will cross 7.0 anytime between now and the end of 2018,” Pang said. “And the chances of such would be high if the sideline meeting of President Xi and President Trump at the G20 shows no progress in delaying the proposed increase in tariffs on US$200 billion of Chinese goods from 10% to 25% on Jan 1, 2019.”

After crossing 7.0, the currency pair could pull back slightly but the RMB would then continue to depreciate further, she said, adding that USD/CNY and USD/CNH to reach 7.3 by the end of 2019.

BBVA: RMB wouldn't fall below 7.0

BBVA Research, the research arm of Spanish banking group BBVA, recently predicted that the Chinese central bank might deploy the measures implemented during the 2015 market turmoil.

“If the RMB exchange rate approach the psychological level of 7 in the future, the central bank might impose capital control, intervene in the Hong Kong offshore market, and use foreign reserves to defend,” said BBVA's chief economist for Asia Le Xia said.

The continuing depreciation pressure will last for the following months due to unsettled trade war and slower domestic growth. “However, we don’t think the RMB will breach the psychological level of 7 because the central bank doesn’t want any financial turmoil like that in 2015 again,” Xia estimated. “Under the current circumstance, the equilibrium rate should be in the 6.7-7 range.”

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