China's Forex Reserves Shrink to Lowest Level Since 2011

(Beijing) – China's foreign exchange reserves fell $15.9 billion to $3.18 trillion in August, compared to the previous month, as the yuan continued to depreciate against the U.S. dollar.

Foreign reserves were at their lowest since December 2011, data from the central bank showed.

Outbound cash flow picked up toward the end of August as the yuan weakened, especially in the second half of the month, said Donna Kwok, UBS' senior China economist.

The yuan's reference rate against the U.S. dollar, set by the central bank, rose from 6.60 on Aug. 17 to 6.69 on Aug. 31.

While there is still room for the yuan to depreciate in the coming months as the dollar strengthens amid expectations of a rate hike from the U.S. Federal Reserve, its central parity rate against the U.S. dollar is not likely to rise above 6.80, Kwok said.

If there is a steep fluctuation in the exchange rate, the central bank will intervene to stabilize the yuan using monetary policy tools and drawing on both domestic and foreign currency funds, central bank Deputy Governor Yi Gang told world leaders at the recent G20 summit.

China's foreign exchange reserves have fallen since they peaked at $3.99 trillion in June 2014. In December 2015, reserves declined by $107.9 billion, the steepest monthly drop in the past two decades, after the U.S. Federal Reserve raised interest rates.

Contact reporter Coco Feng (renkefeng@caixin.com); editor Poornima Weerasekara (poornima@caixin.com)