Decline in foreign reserves fuels talk of outflows in China

A rare decline in the mainland's foreign-exchange reserves has triggered speculation about capital outflows, while a rebound in new yuan loans extended by mainland banks suggests an easing of domestic monetary conditions.

Foreign reserves dropped 2.6 per cent to US$3.89 trillion at the end of last month from US$3.99 trillion at the end of June, the People's Bank of China said yesterday. That was the sharpest quarterly decline on records going back to 1996.

JP Morgan China chief economist Zhu Haibin said the fall in foreign reserves showed the central bank had "deliberately reduced" foreign-exchange intervention since the middle of the year in the belief that the yuan was approaching the fair value and as part of reforms to improve exchange rate flexibility.

In addition, "the moderate decline" in foreign reserves was in all likelihood a reflection of the valuation effect as a stronger US dollar reduced the value of assets denominated in other currencies, such as the euro or yen, in the pool, Zhu said.

Citigroup economists Ding Shuang and Shen Minggao said in a note that if large capital outflows continued, the PBOC might have to cut reserve requirement ratios to maintain M2 growth of about 13 per cent.

M2, a gauge of money supply, rose 12.9 per cent at the end of September from a year earlier, up from the 12.8 per cent gain the previous month.

Banks issued 857.2 billion yuan (HK$1.1 trillion) worth of new yuan loans last month, after extending 702.5 billion yuan in August. The consensus market forecast for new lending last month was 740 billion yuan.