By Valentin Schmid, Epoch Times | September 7, 2015
Last Updated: September 7, 2015 11:23 am
A clerk counts stacks of Chinese yuan and U.S. dollars at a bank in Shanghai, China in this file photo. (China Photos/Getty Images)
Ever since the devaluation of the yuanin mid-August, the market woke up to the fact that China had to sell parts of its massive pile of foreign exchange reserves to defend the currency from slipping further. The only question was how much?
On Monday morning we are a bit smarter as the People’s Bank of China (PBOC) said it reduced the amount of foreign exchange reserves by $94 billion to $3.557 trillion—down $286 billion for the year and $421 billion since the peak in March 2014.
This confirms most estimates of a reduction of $100 billion, but Goldman Sachs says the real number could be higher. “Sales of foreign exchange reserves might have been underestimated by around US$20bn, given the currency valuation effect,” the company says in a note.
Because of movement in exchange rates during the time period, China could have sold $114 billion but would have made up for it because positions denominated in other currencies rose in value.
Either way, the number is frighteningly large for just one month. If the sales go on like this, we are looking at another $400 billion until the end of the year, with possible side effects for the Western markets.
Most economists agree the yuan is about 15-20 percent overvalued, so the PBOC will have to let it go sooner or later anyway. Recently Russia and longer ago England have had very bad experiences defending their currencies by selling foreign exchange reserves.
MORE:How Much Can China Move the Treasury Market?A September Rate Hike Could Be More About Power Than Financials
It has been proven time and time again that the market is simply much biggerthan central banks, even in the case of China.
Jeffrey Snider of Alhambra Investment Partners said: “The outflows have been tremendous. There is no guarantee that this will remain stable, and if conditions worsen, it could grow exponentially into a run.”
http://www.theepochtimes.com/n3/1746190-its-official-china-dumped-94b-of-treasurys-in-august/
