China forex reserves hit 4-year low in August as PBoC indulges to defend USD/CNY at 6.70 mark

China’s foreign exchange reserves dropped to the lowest level since 2012, suggesting that the People’s Bank of China (PBoC) was intervening to defend USD-CNY at the 6.70 mark.

China’s foreign reserves dropped by USD 15.9 billion in August, to USD 3.19 trillion, the lowest since 2012. In SDR terms, China’s FX reserves declined by 17.3 billion. In the meantime, China’s August trade data came in stronger than expected.

Exports declined 2.8 percent y/y in August, up from -4.4 percent in the previous month. Imports surprisingly rose 1.5 percent y/y in August, the first monthly gain since October 2014. The improvement in China’s imports is partially due to base effects.

But more importantly, it might reflect a restocking process in the commodity sector. As CNY will be officially included in the SDR basket from October, it is believed that China’s central bank will continue to cap USD-CNY at 6.70 in the foreseeable future in order to dampen market volatility, Commerzbank reported in its latest research note.

The yuan exchange rate composite index, which measures the currency's strength against a basket of currencies including the US dollar, euro and Japanese yen, came in at 94.33 at the end of August, down 1.06 per cent from a month earlier. PBoC data also showed that the country's official gold reserves stood at USD 77.18 billion down from USD 78.89 billion in July.