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China/Yuan (CNY), Feb. 2016 (FX-Reserves)

China/Yuan (CNY), Feb. 2016 (FX-Reserves)

Société Générale, using the International Monetary Fund’s rule of thumb on reserve adequacy, estimates that China’s foreign-currency reserves are at 118% of the recommended level.

China Forex Reserves (2015), zerohedge

But that cushion (my word creation:) MIGHT evaporate soon on a combination of capital flight and the continuing effort by financial authorities to stem a dramatic drop in the currency. China’s reserves totaled USD 3.33 trillion in December 2016, according to official government data. Edwards estimated that China’s foreign-exchange reserves fell by about USD 120 billion in January, a trend that is likely to continue in the foreseeable future. The sharp fall in FX-reserves can be seen in the chart above.

“When foreign exchange reserves reach $2.8 trillion—which should only take a few more months at this rate - foreign exchange reserves will fall below the IMF’s recommended lower bound,” he said.

The yuan currently moves within a trading band set by the People’s Bank of China that the central bank can change at will.

“We estimate that if capital outflows maintain their current pace, the PBoC would be unable to defend the yuan for more than two to three quarters,” Wei Yao, Société Générale’s China economist, said in a report published earlier this month. (My two bits: This would mean that by the end of November 2016 we would have something new to think about...)

“China’s reserves have already fallen by $663 billion from mid-2014, and a further decline of this scale would start to severely impair the Chinese authorities’ ability to control the currency and mitigate future balance of payments,” she said.

Against this backdrop, Société Générale is projecting the yuan (USDCNY) to sink to 7.5 against the U.S. dollar this year, significantly weaker than 7 yuan to the buck predicted by most economists. The dollar is currently at 6.56 yuan, as can be seen in the following chart (which is updated automatically/daily):

Barclays, meanwhile, projected China’s reserves to have dropped by as much as $140 billion last month to USD 3.19 trillion - or more than Edwards has forecast. “If correct, this would be the biggest monthly drop in foreign exchange reserves on record,” said David Fernandez, an analyst at Barclays, in a note.

sources: (When 3 Trillion Just Isn't Enough: Analysts Fret Over "Worrying" China Reserve Burn) (Gold, Bitcoin Soar After China Liquidates Most Reserves On Record To Defend Currency) (5 Ways To Profit From A China Downturn In 2014)