BBVA predicts China’s foreign reserves could decline to US$3.3 trillion

HONG KONG - China’s recessionary trade surplus and a widening trade surplus resulting from a mix of weak exports and even weaker imports, continued in August, as reflected in today’s announced August trade data. In particular, on-year growth in exports fell short of expectations despite its low base in the same period of last year, indicating that the August 11 3% currency devaluation has failed to boost exports immediately.

BBVA Bank comments that, more importantly, China’s widening trade surplus, coupled with a significant diminishment of foreign reserves (down by a record US$93.9 billion in August as reported yesterday), suggest that the authorities have spent an enormous amount of money in stabilising market confidence in the exchange rate after their rash move into currency devaluation.

“Looking ahead, the authorities are likely to defend the exchange rate at the expense of more reserves loss,” BBVA says. “We project that China’s foreign reserves could decline to US$ 3.30 trillion as of end-year, compared to US$3.56 trillion at end-August.

“In the meantime, the authorities will tighten capital account restrictions and implement more macro-prudential measures to stem capital outflows.”  www.bbvaresearch.com (ATI).