NVDA gained a massive 197% since our AI first added it in November - is it time to sell? 🤔Read more

China: Decline In FX Reserves Shows Rising Vulnerability

Published 07/12/2016, 12:45
USD/CNY
-
DX
-

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.

To read the entire report please click on the pdf file below

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.