China Burning Through Its Reserves
World Economy

China Burning Through Its Reserves

Investors will be on the lookout for evidence that China is denting its sizable foreign exchange reserves when the People’s Bank of China releases data for January on Sunday, potentially underlining fears that Beijing is in danger of running out of ammunition as it battles a crisis of confidence.
“In a nutshell, we believe capital outflows will continue as long as markets expect the Chinese yuan to depreciate,” said analyst David Fernandez at Barclays, in a note, MarketWatch reported.
Most economists expect a sharp drop in reserves—ranging anywhere from $38 billion to $180 billion—as investors continue to withdraw funds from the country. The country’s reserves had fallen a record $108 billion to $3.3 trillion in December.
“The market remains content that massive firepower remains to support the renminbi. It does not,” said Albert Edwards, Societe Generale global strategist, who predicted that China will soon burn through its reserves and be forced to float the yuan within the next six months.

The China narrative took a decidedly gloomy turn in recent weeks with Beijing warning billionaire George Soros against shorting the yuan after he predicted a hard landing of the economy.
Yet, instead of deterring China bears, the public challenge appears to have emboldened Wall Street investors like Kyle Bass of Hayman Capital Management, who is throwing most of his hedge fund’s resources into betting against the yuan.
“You can’t grow your banking system 1,000% in 10 years and not have a loss cycle. And your currency won’t stay strong when you go to rectify that balance,” Bass said in an interview with CNBC.
Barclays’ David Fernandez in Singapore projected China’s reserves to be depleted by as much as $140 billion, falling to $3.19 trillion in January, which would make it the largest monthly drop on record.
Barclays does include a caveat, that it wouldn’t take much to blow the calculations off course: “Note, small modifications in our assumptions can change these estimates to a wide range of $80-180 billion.”
But the message is clear; China’s grand pile of dollar reserves is being run down at an ever faster rate.
In contrast, Claudio Piron, a currency strategist at Bank of America Merrill Lynch, expects a more moderate decline of $38 billion which is significantly below what other economists are forecasting. But there is a catch.
“One of the key barriers to forecasting China FX reserves is that it is a residual or outcome of a number of other variables,” he said.
In other words, trying to accurately predict China’s reserves is a tricky endeavor.


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