China’s Reserves Retreat From $4 Trillion Mark as Outflows Seen

China’s Industrial Production
Employees work near aluminum tubing used in the manufacture of bicycles at a factory in the Kunshan area of Suzhou, Jiangsu Province. China’s industrial production grew 6.9 percent from a year earlier in August, the weakest pace since the global financial crisis. Photographer: Nelson Ching/Bloomberg

China’s foreign-exchange reserves unexpectedly fell by the most on record in the third quarter, a sign speculative capital is being pulled from the country amid concern about a deepening economic slowdown.

The holdings, which are more than triple the size of any other nation’s, declined by $103 billion to $3.89 trillion, according to figures released today. The median projection of economists surveyed by Bloomberg was for an increase to $4.01 trillion from $3.99 trillion, after a $172 billion advance in the first half of the year. Reports last month showed China’s imports unexpectedly contracted in August, while aggregate financing and industrial production fell short of estimates.

“Today’s data shows some hot money outflows as people were concerned about the economy with the not-so-great data for August,” said Nathan Chow, Hong Kong-based economist at DBS Group Holdings Ltd. “This isn’t necessarily bad news for China as the government prefers more two-way flows of capital.”

The People’s Bank of China engineered a decline in the yuan in the January-April period to deter speculation that the currency was a one-way appreciation bet following gains in all but one year since a peg ended in 2005. Economists predict the world’s second-largest economy will expand 7.3 percent in 2014, the slowest pace since 1990, as the government cracks down on corruption and diffuses a property bubble.

China’s industrial production grew 6.9 percent from a year earlier in August, the weakest pace since the global financial crisis. Aggregate financing, the broadest measure of credit, was 957.4 billion yuan ($156 billion), trailing a 1.14 trillion yuan forecast. Yuan positions at Chinese financial institutions from foreign-exchange purchases, a barometer of capital flows, fell 31 billion yuan in August in their second monthly drop this year.

Yuan Impact

The decrease in foreign-exchange reserves “has a negative psychological impact on the yuan,” according to Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB.

The currency was 0.03 percent stronger today at 6.1240 per dollar as of 12:43 p.m. in Shanghai, having climbed to a seven-month high of 6.1209 before the reserves data. September’s 0.06 percent advance was the smallest in five months.

There “was a flight-to-safety for investors in September” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “If there’s no panic then I suspect China’s foreign reserves will stabilize and go up a little bit by the end of the year.”

PBOC Intervention

China’s reserves are now more than 50 times bigger than they were at the start of 1996, the year of the earliest available readings in data compiled by Bloomberg. The holdings surged as the country became the world’s largest exporter, assisted by the central bank’s dollar purchases that helped limit gains in the currency. China has shown “some renewed willingness” to allow appreciation, the U.S. Treasury said yesterday in a report, while adding that the yuan “remains significantly undervalued.”

The latest decline in the holdings may in part be due to exchange-rate moves reducing the dollar value of China’s holdings of assets denominated in euros and yen, according to Li Jie, head of the foreign-exchange-reserve research center at the Central University of Finance and Economics in Beijing. The euro fell 3.8 percent versus the greenback in September, while Japan’s currency depreciated 5.1 percent.

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