China's capital outflows continue as PBOC props up yuan
China’s foreign exchange reserves declined by $15.9bn in August to a five-year low, which was marginally more than economists expected and is likely to put further pressure on the country's currency.
After its efforts to intervene in the market to support the renminbi, the People’s Bank of China (PBOC) said on Wednesday FX reserves had shrunk to $3,185bn by the end of last month, the lowest level since 2011.
China's hoard of overseas funds peaked at $4trn in June 2014 and have been shrinking at pace in recent months as forex markets react to growing speculation of an interest rate hike by the US Federal Reserve.
Economist Julian Evans-Pritchard at Capital Economics said the PBOC was intervening heavily to prop up the currency and that ouflows were likely to continue to weigh on the yuan.
"Today’s data suggest that capital outflows from China remain sizeable which is likely to put further downward pressure on the renminbi in the coming months," he said.
Adjusting for the impact of valuation and exchange rate effects, Capital Economics calculated that FX sales by the PBOC were around $30bn last month, not much changed from July, while a likely $20bn increase in the current account surplus pointed to the largest capital outflow since the panic about the renminbi and China at the start of the year.
"Looking ahead, outflows may ease somewhat this month given that disappointing US data has pushed back expectations for a Fed rate hike," Evans-Pritchard said.
"Nonetheless, the key takeaway is that although concerns about China are no longer front page news, capital outflow pressures haven’t gone away. We expect the PBOC to respond to these pressures by continuing to allow gradual renminbi depreciation."
He said he expected the currency to end the year at 6.80 against the dollar, from 6.67 now, before dropping to 7.00 by the end of 2017.