China Foreign-Currency Reserves Drop on Trade Tensions, Yuan

(Bloomberg) -- China’s foreign-currency holdings fell in September, as heightened trade tensions with the U.S. fueled concerns of capital outflow and further yuan depreciation.

Reserves declined by $22.69 billion to $3.087 trillion in September, the People’s Bank of China said Sunday. That compares with $3.110 trillion the previous month and the median estimate of $3.105 trillion in a Bloomberg survey of economists.

The small drop in reserves was due to changes in the of foreign currencies and asset prices, the State Administration of Foreign Exchange (SAFE) said in a statement, adding that the holdings will generally remain stable despite some fluctuations.

The nation’s reserve holdings, the world’s biggest, have shown modest fluctuations in this year as capital controls remain in place and policy makers have taken measures to stabilize the falling currency. That said, amid a worsening trade-war outlook, negative sentiment around China’s economy and a surging U.S. dollar could yet test the nation’s defenses.

"China’s foreign-exchange reserves should decline given a stronger dollar and increasing depreciation pressures on the yuan, which could prompt the PBOC to intervene," said Ken Cheung, a senior currency strategist at Mizuho Bank Ltd. "Also, capital outflows should be increasing due to mounting risks on China-U.S. trade war risks."

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