China spent roughly $32bn in foreign exchange reserves to strengthen the renminbi in October, its heaviest monthly intervention in nearly two years in the latest sign of Beijing’s nervousness about the economy.

The data released on Wednesday eased worries that Beijing intended to deploy exchange-rate devaluation as a weapon in its trade war with the US. But it also highlights the dilemma facing China’s central bank as it seeks currency stability without draining reserves.

Some analysts believe authorities do not want the currency to weaken beyond Rmb7.0 per dollar, which some view as a psychological threshold. The onshore renminbi closed at Rmb6.93 to the dollar on Wednesday.

The central bank is also keen to maintain forex reserves above $3tn, leaving the People’s Bank of China with less firepower to defend the currency than during the last bout of depreciation. 

Official foreign exchange reserves fell to $3.053tn by the end of October from $3.087tn a month earlier, the PBoC said on Wednesday. Excluding valuation effects, that implies intervention of about $32bn, according to FT estimates, the largest monthly intervention since January 2017. 

Iris Pang, Greater China economist at ING in Singapore, said the monthly drop in October was small compared with late 2015, when monthly declines averaged $70bn over a six-month period.

“There is no capital outflow panic in China even as USD/CNY approached 7.0,” she wrote in a note on Wednesday. “The USD/CNY 7.0 handle is a mere round number, not a psychological barrier, as the currency pair has approached this level a number of times.”

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But capital outflow is accelerating. Balance of payments data released on Monday showed net financial outflows of $19bn in the third quarter, the first quarterly outflow since late 2016, though still far below outflows of $96bn in the fourth quarter that year. 

China’s forex reserves peaked at just under $4tn in mid-2014, but in the following two-and-a-half years the PBoC burnt through nearly $1tn to prop up the renminbi amid a capital outflow surge.

Such intervention declined significantly from early 2017 through the middle of this year, after tighter capital controls and a strong economy eased pressure on the renminbi. But downward pressure has resumed in recent months, as a rising US dollar— fuelled by Federal Reserve interest-rate hikes — coincided with a weakening Chinese economy and concerns that US tariffs would shrink China’s trade surplus

China posted a current account deficit of $13bn through the first nine months of this year, putting the country on pace for its first full-year deficit since 1993, according to balance of payments data. 

Still, many analysts believe authorities are willing to accept moderate renminbi depreciation as long as it does not spiral into panic selling.

“We don’t advise the central bank to intervene in the market because this currency depreciation is caused by the stronger dollar,” said Li Yong, chief fixed-income analyst at Northeast Securities in Beijing. “The situation today is much more advantageous than in 2015.”

Additional reporting by Yizhen Jia

Twitter: @gabewildau

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