Last week China announced a fall of USD 100 bln fall in forex reserves in the third quarter — the largest such drop since 1996.

China’s foreign reserve pile fell to $3.89 trillion from $3.99 trillion prev. Guan Tao, head of China’s State Administration of Foreign Exchange’s balance-of-payments department, cited the end of the Federal Reserve’s quantitative easing policy as a main factor contributing to the decline, adding there were no risks or problems.

But the jury is out on that excuse/reason especially when this rare reduction of China’s reserves coincides with the economy growing at its slowest pace in five years, according to Q3 data.

In recent decades, China’s reserve accumulation has been the fuel for its massive money-supply growth. Thanks to twin capital and trade surpluses, the PBOC has been able to behave like a massive money-printing machine.

Now, as reserve accumulation goes into reverse, so too does the money supply. M2 — which includes currency, checking deposits and some time deposits — grew at just at 12.9% yy for September, versus 14.7% yy for June.

SocGen’s Albert Edwards warns that China faces a looming credit crunch and is already on a deflationary precipice. China’s consumer inflation rate slowed to 1.6% in September, down from 2% previously

All adding to the melting pot of fact/fiction and the reality to come

MarketWatch has more on the subject here which Adam spotted on his week-end news trawl