China says any future fluctuation in FX reserves 'normal'

BEIJING (Reuters) - China's central bank flagged the chance of further fluctuations in its foreign exchange reserves on Tuesday, but said these would be "normal" as it defended a new regulation imposed on its currency forwards market earlier this month.

Official data on Monday showed China's foreign exchange reserves, the world's largest, dropped by a record $93.9 billion in August to $3.557 trillion, reflecting the government's attempts to stem a slide in the yuan following a surprise currency devaluation.

Analysts have said China's efforts to prop up the yuan were futile as its reserves are not bottomless, and market forces will have to hold sway at some point. But in an oblique response to comments that the world's second-largest economy was burning through its reserves, the People's Bank of China (PBOC) countered that "China has sufficient reserves".

It said the Chinese economy can sustain its mid- to high-speed growth in the long run, and will continue to run a current surplus - which should help grow future reserves.

The PBOC conceded that the drop in reserves in August was due partly to its intervention in the foreign exchange market, but noted fluctuations in other currencies also played a part.

It said a growing preference among households and companies for foreign currencies also reduced China's stockpile, and a drawdown in entrusted loans funded by the reserves had exacerbated the decline.

As China continues to refine its foreign exchange system and increase international use of the yuan, "future rises and falls in the foreign exchange reserves would also be normal," it said.

NOT A CAPITAL CONTROL

In a separate statement late on Tuesday, the PBOC addressed concerns about a new control requiring banks to set aside 20 percent in foreign exchange reserves on behalf of clients trading currency forwards.

The measure was unveiled as the yuan experienced its most volatile year in a decade. The shock August devaluation preceded a sharp fall in the yuan, followed by an unexpected period of gains as authorities moved to shore up the currency to deflect accusations they had triggered competitive devaluations between nations.

The new rule, effective Oct. 15, has not been announced by the PBOC, but has been widely leaked by sources in the financial sector.

Countering talk that the regulation is a type of capital control, the PBOC said it "obviously" wasn't as banks are not prohibited from trading currency forwards.

Instead, it said the new regulation was necessary as the volume of transactions in currency forwards in China trebled last month from the monthly average in January-July, in a sign that "speculative trading" was in play.

Such "herd mentality response" affected financial market order, and regulatory action was needed to curtail "excessive volatility" and prevent financial risks, the bank said, especially as more companies are likely to suffer losses on the back of a choppy currency market.

(Reporting by Koh Guiqing; Editing by Ian Geoghegan)

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