Fear Concerning Chinese Reserves Mount

If you didn’t notice, there are increasing concerns reported in the media about Chinese FX reserves.  It all started a year ago or so when the PBOC’s reported FX reserves showed a slowing of accumulation, and then a slow but progressive fall.  The figure peaked at around $4tn but has since been reported at just over $3tn.  It seems a lot, $3tn, but it has fallen quite fast and the use of the reserve has been in favor of helping the slow but inexorable fall of the yaun, especially against the dollar.  To help the Chinese authorities even changes the way their currency was valued, using a basket of currencies that should have muted the dollars’ rise.  Even that has not helped.  

The concerns by onlookers are mounting.  Every weekend, now almost every day, there are reports of one concern or another.  Last weekend I noted in the US print edition of the Financial Times: Scepticism rife as G20 tries to calm FX.  The G20, meeting in China, was trying to signal to the market that there was nothing untoward about the fall in Chinese FX reserves.  This was an important article since the point was that the G20 itself was voicing support for China – and if the G20 is that concerned, so should we.  In today’s US print edition of the Financial Times there is another article: Concerns grows over Chine’a forex reserves.  The good news is that the most recent data suggest that the outflow of China’s FX is showing signs of easing.  This is good news.  We don’t want China to attract negative market sentiment should it feel that the reserves might be inadequate.  That might lead to a run on the Chinese currency and this would cause turmoil in the markets, and then the global economy. We need to keep an eye on this data point – more so then we should care about the US trade imbalance with China (which is part of the root of the FX build up).

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