China’s reserves meltdown: The implications and RMB future – Nomura

By FXStreet FXStreet (Delhi) – Research team at Nomura, note that the recent sharp fall in China’s forex reserves of USD93.9bn m-o-m (-2.6%) in August, has raised short-term market concerns over the sustainability of the PBoC’s aggressive FX USD selling intervention, and increased RMB depreciation expectations.

Key Quotes

“However, in our view, China still has the capacity to hold USD/CNY stable in coming months even if outflows continue at a rate similar to that of August. There is a risk attached, however, as China’s FX reform movement may have to slow or even regress given the heavy FX intervention and capital controls that would be required.”

“Although we believe China will continue to experience relatively large capital outflows in September from deleveraging and FX hedging of foreign currency (FC) liabilities, the pace is expected to slow into Q4 2015.”

“Within G10 currencies, the current intervention is large enough to matter if China does indeed rebalance reserves. Furthermore, we do not know how mechanical any rebalancing process would be, especially as central banks have been reducing EUR’s share of reserves over the past year. In addition, the question of whether the reserve drawdown was a one-off event or the start of a new trend is clearly …read more

Source:: FX Street