China FX reserves fall record $93.9 bln in Aug as central bank supports yuan

By Meng Meng and Kevin Yao

BEIJING (Reuters) - China's foreign exchange reserves, the world's largest, shrank by $93.9 billion in August, the biggest monthly fall on record, reflecting the scale of intervention by the central bank to support the yuan after a surprise devaluation last month.

The People's Bank of China reported reserves had dropped to $3.557 trillion, having descended from a record $3.99 trillion in June 2014, as capital outflows escalated due to fears over China's economic slowdown and prospects of rising U.S. interest rates.

"The drop was, in our view, due to capital outflows and heavy intervention to stabilise the currency after the fixing mechanism change last month," said Dariusz Kowalczyk, senior economist/strategist at Credit Agricole CIB in Hong Kong.

A large portion of China's reserves are held in U.S. Treasuries. Last week, traders suspected China of selling Treasuries.

Kowalczyk said the actual reserve loss was bigger given positive impact of valuation changes as the dollar fell against other major currencies.

"That said, it was probably a one-off, China retains massive reserves which will be sufficient to protect the CNY, and we see only limited depreciation – to 6.50 – by year end," he said.

The yuan closed at 6.3659 per dollar on Monday.

Despite the fall in reserves in August setting a record, it was a lot less bad than some commentators had feared. There had been speculation that China's reserves could have lost around $200 billion in the month.

"Today’s data on China’s foreign exchange reserves suggest that the People’s Bank (PBOC) is not burning through its reserves as quickly as many had believed," Julian Evans-Pritchard, China Economist at Capital Economics, said in a note to clients.

The reserves fell by $42.5 billion in July. The previous record monthly drop occurred in May 2012, when the reserves dropped by $92.8 billion.

The decline quickened last month after China's near 2 percent devaluation of the yuan on Aug. 11 stoked fresh concerns about its economy. The move sparked heavy selling of the yuan, and the central bank has intervened repeatedly since then via state banks to sell dollars to shore up the currency.

China has been so surprised by the global market reaction to its devaluation that it is likely to keep the yuan on a tight leash in the near-term to head off fears of a global currency war, policy insiders told Reuters.

But many traders believe there is political pressure to allow a deeper depreciation in coming months as the world's second-largest economy slows.

LEAKY YUAN

The latest Reuters poll showed strategists expect the yuan to weaken another 2 percent in six months, though some were more pessimistic and predicted it would dive to 6.80 in 12 months.

The central bank's heavy dollar sales is complicated by the need to pump money into the economy to stem the slowdown, analysts say.

Much of the money released into the economy by cutting banks' reserve requirements may merely replace funds being moved offshore, rather than finding its way into new loans to companies which would support the real economy, they say.

The central bank's latest cut in bank reserve requirement, which was announced on August 25, took effect on Sunday.

The value of China's gold reserves stood at $61.8 billion at the end of August, up from $59.24 billion at the end of July, the People's Bank of China said on its website.

China's International Monetary Fund (IMF) reserve position stood at $4.73 billion, up from $4.37 billion the previous month. It held $10.53 billion of IMF Special Drawing Rights at

the end of last month, up slightly from $10.46 billion at the end of July.

The central bank in July shifted to reporting its foreign exchange reserves on a monthly basis after adopting the IMF's Special Data Dissemination Standard (SDDS). The bank had

previously released the data on a quarterly basis.

(Additional reporting by Nicholas Heath; Editing by Simon Cameron-Moore)