Chinese foreign exchange reserves recorded their biggest fall in August, a reflection of increased intervention by Beijing to stabilize the country’s economy following months of stock market volatility that has led to a rebasing of the yuan.
China’s foreign currency reserves, the largest in the world, dropped by $93.9 billion in August to $3.557 trillion as per reports from the People’s Bank of China (PBOC). The drop reported on Monday led many analysts to wonder how far interventions by China’s government to stem market decline would go in the wake of increased currency outflows and rising U.S. interest rates.
According to Zhou Hao, an economist at Commerzbank, Singapore, "Frequent intervention will burn foreign reserves rapidly and tighten the onshore market liquidity.” The offshore yuan weakened considerably in contrast to the onshore yuan, indicating that investors thought the onshore currency was being kept too high.
The dropping in foreign reserve exchange rates follows the Aug. 11 rebasing of the yuan, or renminbi, by two per cent. The devaluation was seen by analysts as a prediction to worse economic times going forward for the country. The first sign of that came with the plummeting foreign reserves.
Determined to show a stable economy despite internal downward pressure, Chinese policy makers have resorted to pumping currency into the economy through increased spending and easing up on purchases of falling stocks. The PBOC Governor Zhou Kiaochuan said over the weekend that the Chinese markets had corrected their swing and that regulators would increase market reforms to tone down the economic crisis.
The news did little to prop up China’s markets. The CSI300 Index representing the largest companies on the Shanghai and Shenzhen markets dropped 3.4 per cent while the Shanghai index was down 2.5 per cent on Monday.
Earlier, both the Shanghai and Shenzhen indexes had planned to implement a “circuit breaker” allowing them to suspend trading once the country’s indices moved steeply either way. Beijing has not confirmed it would adopt the proposals.
The proposals have come under sharp criticism from analysts. Liu Ligang, China economist at ANZ said, "What's the point? It merely delays the pace of the market fall."
Multiple economic blows have meant that the world’s second largest economy may be in for a prolonged downward trend. Monetary, macro prudential and fiscal policies by the market regulators may not be effective in the near future and investors are bracing themselves for the worst.