China's declining foreign reserves to persist

Total foreign reserves shrank by USD18.8bn to USD3,166.4bn in September.

China's foreign reserves will shrink further over the coming months as the PBoC continues to attempt to defend the Chinese yuan, which is still under significant downside pressure, said BMI Research.

According to the People's Bank of China (PBoC), total foreign reserves shrank by USD18.8bn to USD3,166.4bn in September, versus a contraction of USD15.9bn in August. The decline reflected the central bank's efforts to defend the CNY6.700/USD level when China was hosting the G20 summit in Hangzhou in early September and ahead of the SDR inclusion on October 1.

"We expect foreign reserves to decline further over the coming months, as the PBoC attempts to defend the Chinese yuan by depleting reserves. Indeed, we expect the CNY to weaken gradually against its trade-weighted peers over the coming months," it said

The yuan is still overvalued in real effective exchange rate (REER) terms, and it will continue to face capital outflows over the coming quarters amid an economy that is still in a prolonged deceleration and a fragile banking sector, it added.