China's September forex reserves fall to $3.092 trillion

By Huizhong Wu and Hallie Gu

BEIJING (Reuters) - China's foreign exchange reserves fell more than expected in September despite the yuan rebounding from its biggest monthly drop in 25 years in August amid a cooling domestic economy and rising Sino-U.S. trade tensions.

The country's foreign exchange reserves - the world's largest - fell $14.8 billion in September to $3.092 trillion, according to data from the country's foreign exchange regulator Sunday.

Economists polled by Reuters had expected reserves would fall by $6 billion from August to $3.101 trillion.

The fall in September was due to fluctuations in foreign exchange rates and in the price of assets, the foreign exchange regulator said in a statement after the data release.

Looking ahead, uncertainties in the international economic and financial environment will increase, with the global economy slowing, and trade protectionism and unilateralism on the rise, according to the same statement. Volatility in international financial markets will increase.

China has been able to keep capital outflows under control over the past year despite an escalating trade war with the United States and weakening economic growth at home.

Reserves have rebounded from an October 2018 low thanks to capital controls and rising foreign investments in Chinese stocks and bonds.

In September, the yuan rose 0.14% against the dollar after posting its biggest monthly drop in 25 years in August.

The yuan has now depreciated about 11% against the dollar since the two sides began exchanging tit-for-tat tariffs in April last year.

The dollar rose 0.47% in September against a basket of other major currencies (DXY).

ECONOMIC RISKS

China burned through $1 trillion of reserves supporting the yuan in the last economic downturn in 2015, which also saw it devalue the currency in a surprise move.

China's economic growth risks slipping below the lower-end of Beijing 2019 target of 6% in the third quarter or over the next year, analysts warn, as the trade war with the United States persists.

Factory activity surveys in China pointed to slight improvement in September as domestic demand picked up, but analysts believe the gains will be short-lived as the property market cools and Sino-U.S. trade tensions remain elevated.

Top-level trade negotiators from China and the United States are expected to meet in Washington on Oct.10-11 to determine if they can agree on a truce in the trade war, but most analysts doubt a durable agreement can be reached.

Higher U.S. tariffs on Chinese goods are due to take effect in mid-October and mid-December, and sources told Reuters the Trump administration is considering radical new pressure tactics on Beijing, including the possibility of delisting Chinese companies from U.S. stock exchanges.

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To shore up the Chinese economy, the central bank in early September cut banks' reserve requirements for the third time this year, releasing 900 billion yuan ($126.35 billion) in liquidity. China also trimmed its new benchmark lending rate in September for the second month in a row.

Still, with higher U.S. tariffs looming, analysts say more forceful measures will be needed soon to avoid a sharper slowdown in the world's second-largest economy.

China has also been ramping up its gold reserves this year.

It held 62.64 million fine troy ounces of gold at end-September, up 5.2% from 59.560 million ounces at the end of 2018.

The value of its gold reserves fell to $93.045 billion at end-September from $95.45 billion at the end of August.