China’s FX reserves likley fell further in August

There were further reports and rumours yesterday that the proposed reserve requirement for FX forwards trading could be extended to all derivative products. For example, for forwards and swaps, 20% of the nominal value will need to be set aside. This will be denominated in USD, at zero interest rate, and held for one year. 

For options, the reserve requirement is rumoured to be as high as 50% of the nominal value. The new measures are expected to take effect from 15 October 2015. As noted previously, this is aimed to 

1) Curb speculation and unwarranted volatility in the FX market

2) Reduce PBoC intervention to stem CNY depreciation pressures. 

There have not been any official announcements as yet. China is closed for the next two days for the Victory Day parade. As an indication of PBoC's intervention over the past year, China's FX reserves have fallen by 8.5% or USD342bn to trn at end-July 2015 vs the peak of trn in June-2014. 

"It most likely fell further in August given the devaluation on 11 August and measures to stem a further slide. Since the start of the year, it is down around USD192bn or USD27bn per month. A recent Bloomberg survey in early August has analysts expecting a further USD200bn drop in FX reserves to trn by year-end", says Commerzbank. 

This implies around USD40bn per month from August to December, which also gives an estimate of the expected size of PBoC intervention. August's FX reserves are scheduled to be released on 7 September.