China: Decline in FX reserves shows rising vulnerability
|-
Chinese FX reserves for November fell more than expected to USD3051.6bn – a decline of around USD69.1 bn. Reserves have not been lower since February 2011.
-
It was the biggest drop since January this year, when outflows were very high. However, a big chunk of the decline was due to valuation effects, as most currencies weakened against the USD in November, lowering the value of non-USD reserves (USD index increased 3.3% in November). We estimate adjusted reserves fell USD40bn, which is still the biggest drop since January, pointing to increased intervention from the PBoC recently into the depreciation of CNY versus the USD.
-
Chinese reserves have fallen a total of 25% from the peak in 2014, shaving off USD1trn out of the USD4trn reserves it had in 2014. Hence, even though reserves are still high, they can fall quite rapidly. A few years down the road – or possibly before – FX reserves may have eroded enough for China to be unable to defend a rapid depreciation.
-
This is probably the reason why China is now tightening capital controls. Recently, limits have been put on outbound direct investments and on imports of gold. However, this in itself can end up proving to be destabilising if it reinforces outflows from the viewpoint of ‘getting money out while you still can'. For example, a Chinese citizen is entitled to exchange USD50,000 from CNY every year. If people fear this could be banned at some point, it might encourage some to do it while it is still possible.
-
Although it has been calm around China since the start of the year, we continue to see a high risk that financial turmoil could return in 2017, when growth is expected to slow down again. We continue to recommend short CNH as a hedge against a potential crisis and hedging of CNY receivables.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.