A CHINESE ARSENAL IS DRAINED
China's forex reserves have shrunk by nearly a fifth since summer of 2014, as Beijing has moved to shore up
value of its currency
As markets around the world have churned, China has long taken comfort in having what in the financial world
amounts to a life pre server: its vast holdings of other countries' money .
A year-and-a-half ago, China held as much as $4 trillion in foreign exchange reserves. The reserves represented
a symbolic trophy for China's leaders, who have described them as the blood and sweat of the workers and
upheld them as a sign of national strength.
Now, as China's economic growth slows, that sign of national strength is slowly ebbing.
China's foreign exchange reserves are shrinking steadily as money flows out of China and Beijing moves to shore
up its currency . The country's reserves have shrunk by nearly a fifth since summer 2014 -and more than a third
of the shrinkage has been in the last three months. By the end of January , reserves stood at $3.23 trillion, a level
that has prompted speculation about how much lower Beijing will let them go. With a smaller pot of reserves,
Chinese leaders have less room to maneuver, should the economy undergo a sudden shock. The reserves
situation also weakens China's control over the value of its currency , the renminbi. The drop in reserves could
also hurt China's efforts to raise its global profile, as it doesn't have as much money to pump into high-profile
projects in developing countries.
If you use up $700 billion of reserves, how much more is going to follow?
That is the basic problem, said Guntram Wolff, director of Bruegel, a non-profit
economic research institute in Brussels.
The dwindling reserves are one of the many factors shaking global investor
confidence because of the impact the slide could have on China's financial
system. A number of investors are betting that China may have to let its
currency depreciate, rather than dip further into its reserves.
Chinese officials are fighting back. In a rare interview published last weekend
by Caixin, a Chinese magazine, Zhou Xiaochuan, the governor of China's
central bank, said, China has the largest volume of foreign exchange reserves in the world, and we will not let
speculative forces dominate market sentiment.
China's reserve hoard is a byproduct of how it manages its currency .
During
China's biggest boom years, its currency could have risen in value as huge sums in dollars, euros and yen flowed
into the country. Instead, Beijing tightly controlled the value of the renminbi, buying up much of the inflows and
putting them into its reserves instead. That brought angry accusations from the United States and Europe that it
was manipulating its currency to help keep Chinese exports inexpensive and competitive in foreign countries.
Now that the renminbi faces pressure to fall, China is spending its reserves in an effort to prop up the currency .
But many American lawmakers and presidential candidates still accuse China of keeping its currency artificially
weak.The reserves are still considerable, more than double Japan's, which has the world's second largest
amount. The central bank chief, Zhou, and others have questioned whether the reserves were too big and the
money could be better invested if left in the private sector. Zhou led a move over the last two years to make it
easier for Chinese companies and families to invest their own money overseas, only to find in recent months that
the outflows have been disconcertingly fast at times.
The erosion of reserves is also politi cally awkward, given public perception, and Beijing has taken steps aimed
directly at shoring them up.
One move would keep more of its reserves free of long-term commitments. China's central bank now demands
that at least some foreign money managers who want to invest part of the reserves pledge to achieve an annual
return of as much as 26% or else their management fees will be reduced.Chinese markets rose this week, as
some investors bet that China could slow the erosion. Expectations have faded that the Federal Reserve will keep
raising interest rates this year, making China look more attractive. And China is running huge trade surpluses,
bringing in a steady inflow of foreign money .
Economists inside and outside China are increasingly trying to guess how far reserves must fall before China
might consider a sharp devaluation of the currency . An IMF model suggests that an economy of China's size
needs $1.5 trillion with strict capital controls and $2.7 trillion without them.
