China’s forex reserves hit 18-month low as trade war piles pressure on yuan

China’s foreign exchange reserves fell more than expected in October to a 18-month low, suggesting a gradual pickup in capital outflow pressure amid the trade war with the United States.

The reserves fell US$33.93 billion in October to US$3.053 trillion, versus a decline of US$22.69 billion in September, central bank data showed on Wednesday. A Bloomberg survey of economists forecast a drop of US$28.53 billion to US$3.06 trillion.

The modest depletion in the reserves comes as the yuan has lost 10 per cent of its value to the US dollar since February. Still, last month’s drop was small compared with the monthly declines of more than US$100 billion that occurred in 2015 to stem the stronger capital outflows at that time, suggesting that while capital outflows may be picking up, there has been no market panic yet.

“The combination of exchange rate conversion and asset price changes has led to a slight decline in the size of foreign exchange reserves,” the State Administration of Foreign Exchange said in a statement, adding that continued upgrades to China’s economy combined with a further opening up of its markets will be conducive to steady cross-border capital flows.

While Chinese policymakers have been less interventionist in defending the yuan than they were in 2015, they may still be using the dollar reserves to buy yuan in the spot market to slow the pace of the currency’s depreciation and keep market confidence broadly contained.

Sheng Songcheng, a senior adviser to the People’s Bank of China, said last month that China should use its forex reserves to stabilise the yuan’s exchange rate when needed.