Fading Depreciation Worries Fuel China FX Reserve Rise in Sept

     BEIJING (MNI) - China's foreign-exchange reserves increased for the eighth

straight month in September, helped by the positive yuan valuation effect and a

greater volume of forex sales.

     Foreign-exchange reserves increased $16.98 billion during the month to

$3.1085 trillion, the highest level since last October and significantly higher

than the $10.81 billion rise in August, according to data from the State

Administration of Foreign Exchange (SAFE).

     The valuation effect contributed to the rise, SAFE said.

     "In September, cross-border capital flows and transactions became more

stable and balanced," SAFE said on its official website on Monday. "In the

international financial market, the exchange rate and asset prices have had

divergent performances, and foreign-exchange reserve investments in general

appreciated, pushing up the level of foreign-exchange reserves.

     A greater volume of forex sales also contributed to the rise of foreign

reserves, analysts said.

     "In the first 10 days of September, the yuan appreciated against the

dollar, spurring enthusiasm to exchange foreign currencies for yuan," Liu Jian,

senior analyst at Bank of Communications, said on Monday. "Although the yuan

depreciated afterward, foreign-exchange selling remained strong" given the

yuan's recent overall strength and China's high trade surplus, Liu said.

     A Shanghai-based foreign-exchange trader at a commercial bank told MNI that

foreign-exchange selling was strong in the first half of September, while forex

purchases  dominated during the rest of September, generally in line with the

trend of the exchange rate of the yuan, which strengthened from 6.5969 on Aug.

31 to 6.4617 on Sept. 8, and then reversed course to reach 6.6470 on Sept. 29.

     SAFE expects the forex reserve situation to remain stable in the future.

     "As the Chinese economy will remain stable, tending toward positive, and

financial regime reforms will deepen and the financial sector will open up

further, the market expectations will be more stable, and the foundation for

stable cross-border capital flows will be even firmer," SAFE said. 

     Some analysts said it is possible forex reserves could drop slightly, but

not precipitously, in the future.

     "As the valuation effect becomes weaker and the yuan begins to fluctuate,

the pressure on foreign-exchange reserve will be higher," Shenwan Hongyuan

Securities said on Monday. "However, as domestic corporates have paid a large

amount of their foreign currency-denominated debts, and the one-sided

expectations for the yuan to depreciate have been broken, the market will treat

yuan fluctuations more rationally."

     "It is almost totally impossible for foreign-exchange reserves to drop

significantly," Shenwan Hongyuan Securities added.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

[TOPICS: MAQDS$,M$A$$$,M$Q$$$,MT$$$$]