Is China Losing Its Currency Reserves?

As China’s economic miracle unfolded the nation accumulated impressive foreign currency reserves. In 2015 Chinese reserves reached $4 Trillion and since then have been falling as China has sought to support a falling Yuan. According to Trading Economics reserves are down to $3.16 Trillion as of September of 2016. Bloomberg reports that Chinese reserves fell $80 Billion more in October. They suggest that China could be due for a shock fall in foreign exchange reserves.

Beijing was embroiled in a spate of frenzied dollar-selling last month as capital outflows and a depreciating yuan saw foreign-exchange reserves tumble by $80 billion, resuming 2015’s sharp declines in the country’s monetary war chest after a period of relative stability between February and September this year.

That’s the prediction of analysts Khoon Goh of Australia & New Zealand Banking Group Ltd, and Jens Nordvig of Exante Data LLC, a data-driven macro research firm, who reckon markets have underestimated the likely scale of currency intervention by the People’s Bank of China in light of the fall of the yuan relative to the dollar.

Estimating the drop at $80 billion, they reckon Chinese currency reserves fell in October by more than four times the decline registered in the previous month. Their projection is in stark contrast to the median forecast of economists surveyed by Bloomberg, who expect a decline of $26 billion when the People’s Bank of China releases the data on November 7.

Having huge foreign currency reserves has allowed China to invest across the world, provide infrastructure improvement projects in emerging economies in return for access to raw materials. Now as China’s economy slows and its reserves fall there will be less of a market for raw materials than previously and less money to exert influence across the globe. It this just a glitch or is China losing its currency reserves?

What Drives Chinese Policy?

The American Academy in Berlin offers some insight into what drives China’s foreign policy and by extension its monetary policy.

The dramatic rise of China has created concern about a possible “China threat” to the interests of the US and its allies in Asia. But seen from Beijing, the global scene is a terrain of hazards.

China’s regime security and territorial integrity are threatened by forces of social and cultural change that are connected to its embrace of globalization. Around its borders, China contends with twenty immediate neighbors, some threateningly strong and others dangerously unstable. China’s prosperity and political stability are increasingly dependent on global markets over which Beijing exerts little control. In all of these arenas, China faces the dominating presence of the United States.

China faces a serious slowing of its economy. Bill Clinton famously said, “It’s the economy, stupid.” He was referred to why an otherwise successful Republican president (GHW Bush) was voted out of the White House. Likewise Chinese Communists Party leaders are concerned that a dramatic slowdown of their economy could lead to social and political unrest and their downfall. Communist leaders need to use their foreign currency reserves to maintain a reasonable level for the Yuan and keep themselves in power. China many continue to lose currency reserves as leaders in the land of managed capitalism pay with the people’s money to stay in power.