The world’s second biggest economy will see $700 billion leave the country this year, says Goldman Sachs. However, a currency crisis in China is unlikely to happen soon, according to the bank.
Even though capital outflows from China have grown from 2013, the main concern is declining foreign reserves of the People’s Bank of China, according to the Goldman Sachs report, quoted by Business Insider.
Goldman says the situation is not yet critical. China’s reserves stand at $3.2 trillion, off from the more than $4 trillion peak. Goldman Sachs still calls it a “comfortable level”.
At present, Chinese reserves cover 22 months of imports. The IMF benchmark is three months. China’s ratio of reserves to short-term debt is over 300%, while the Greenspan-Guidotti rule states this ratio should cover 100% of short-term debt.
However, Barclays has put forward an alternative forecast, saying China has entered a “zugzwang” in forex reserves, which could fall below what the bank estimates as comfortable levels in as little as six months.
Goldman also predicted a further weakening of the Chinese currency this year, down to seven yuan to the dollar, compared to the current 6.5 exchange.
According to Goldman Sachs, the reasons are China’s debt overhang, overall slowdown in the economy, Beijing’s aim for a weaker currency, as well as additional pressure from the US Federal Reserve which is expected to raise interest rates three times this year.
Tax on Transactions
China’s central bank has drafted rules to tax forex transactions as it also reduced the yuan’s reference rate by 0.26% Tuesday, the biggest cut in over two months, according to reports. The People’s Bank of China hopes to curtail currency speculation that takes advantage of the difference in yuan’s rate on the mainland and offshore.
The initial rate of the forex levy—nicknamed the Tobin tax after Nobel laureate James Tobin—may be kept at zero while authorities fine-tune the rules, according to sources familiar with the matter who spoke to Bloomberg. They added that the tax would be designed to allow legitimate forex transactions, such as hedging, to be undertaken, and that it would target currency speculation.
“The levy will hurt market sentiment and make investors more panicked, as this shows that existing capital controls are not enough to curb outflows,” Andy Ji, a Singapore-based foreign-exchange strategist and economist at Commonwealth Bank of Australia, told Bloomberg.
A tax on foreign exchange transactions would stand in contrast to an increasing role of market forces in the world’s second-largest economy and would also come in the way of China’s plans to create an international reserve currency. The yuan is scheduled to be included in the International Monetary Fund’s reserve-currency basket in October this year.
