New | China reveals record drop in forex reserves

A record fall in mainland China's foreign currency reserves last month validated earlier market observations that the central bank had been defending the yuan from falling further.

But the intervention cannot continue at such a dramatic pace if the world's second-largest economy remains committed to moving towards an open currency regime.

The reserves declined US$93.9 billion, or 2.6 per cent, to US$3.56 trillion from July, the biggest monthly fall on record, according to data released on Monday by the People's Bank of China.

The keenly anticipated figures, slightly short of market estimates of a decline of between US$100 billion and US$200 billion, heightened confusion over the direction of China's foreign exchange policy and the effectiveness of continual monetary easing.

"The pickup in outflows and the PBOC's response raises questions about the outlook for the currency and monetary policy," said Julian Evans-Pritchard, a China economist at Capital Economics. "We suspect that the PBOC is hoping to stem the strong speculative downward pressure that its currency reform created but that, if it succeeds, it will scale back support and allow the [yuan] to weaken gradually."

He estimated the actual fall would be US$110 billion after netting out book gains from the strengthening yen and euro in the past month.