Will China Run Out of Money?

China is in the Forex news again as money flows out of the country. This time it has to do with a change in how many Yuan can be converted into foreign currencies next year. Locals are rushing to take advantage of the current $50,000 limit. Bloomberg discusses liquidity fears in the land of managed capitalism.

The first day of 2017 is when an annual $50,000 quota to convert the yuan into foreign exchange resets, stoking concern there will be a rush to sell the local currency. With tax payments and a regulatory assessment also tightening liquidity in the money market toward year-end, January may bring scant relief as lenders prepare for stronger cash demand before Lunar New Year holidays, which are only a month away.

China’s markets are seeing renewed pressure this month as the Federal Reserve projects a faster pace of rate increases for 2017 and its Chinese counterpart tightens monetary conditions to spur deleveraging and defend the exchange rate. The declines are capping off a tough year for investors during which bonds, shares and currency all slumped.

China´s foreign currency reserves have been falling steadily for a couple of years as the nation tries to stem the outflow of capital to foreign assets and currencies. Last month we wrote about 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.

China has used its huge foreign currency reserves as a tool to persuade smaller nations to trade with it, see commodities and allow local Chinese investment in large infrastructure and mining projects. What will happen if China´s reserves continue to dwindle? Will China run out of money? How about that looming trade war when Trump takes office?

When a Trump presidency was only a dream we asked about a possible trade war.

The election of Donald Trump to the United States presidency has shocked the world. As the new President prepares to take office Forex traders are considering the statements that Mr. Trump made during his campaign in regard to trade with China. He has said that China has been and is taking advantage of the U.S.A. in trade and that he will raise tariffs substantially on Chinese goods in retaliation. Will higher tariffs on Chinese goods start a trade war and how would that work out for the US dollar and the Yuan?

If a trade war occurs it could certainly speed the decrease of China´s reserves.