Record Drop in Reserves, Stock Market Resumes Decline

Official reassurances and stock purchases might have stabilized the Chinese stock market in the morning, but then stocks fell 3 percent in the afternoon. One of the reasons for the decline was the news about currency reserves. In August China spent 3 percent of its reserves, $94 billion. It is the largest monthly decline in reserves ever and adds to the trend of the past year as China tries to support its currency and stock market.

China's reserves fell a lot, but not unprecedented in % terms, at least on a monthly basis. Cumulatively, however... pic.twitter.com/t2lDYRMY7I

— Alex Frangos (@alexfrangos) September 7, 2015

The drop in Chinese FX reserves is big, but lower than some forecasts. Suggests PBOC hasn't spent as much propping up the yuan as feared.

— Peter Thal Larsen (@peter_tl) September 7, 2015

Traders worry that the Chinese central government could eventually feel like it is running out of money. If that day were to come, the yuan and stocks could fall quickly. Without official support, the yuan would fall an estimated 20 percent, and stocks, about 25 percent before leveling off.

The depletion of reserves also shows that analysts who were talking about a currency war in August misunderstood the situation or simply weren’t paying attention.

Meanwhile there are fresh indications of a contracting economy in China. General Motors reported sales in China 5 percent lower than last year, a bigger drop than other automakers had reported.

GM's sales drop in August highlights automaker divide in China (Reuters)

From Friday, German factory orders might have been little changed in July, but foreign orders were down 5 percent and orders from outside the EU were down 10 percent, in line with other measures showing a declining global demand for manufactured goods.

German industry orders fall in July on weak foreign demand (Reuters)