Is China in trouble?
By Duncan Richardson, News Editor
08 Feb 2016
Chinese foreign reserves have fallen for three consecutive months as the Peoples Bank of China attempts to defend the yuan and stop capital fleeing the country.
The countries reserves dropped by $99.5 bn in January to $3.23 trillion, the lowest level since May 2012. Despite still having a significant war chest investors are worried over the shear pace of depletion.
The Chinese government has to defend the yuan as a steep devaluation could potentially send shock waves through an already fragile economy. Many Chinese companies have borrowed in U.S dollars and lower yuan will only increase their debt load.
By selling dollars and buying yuan authorities hope they can stabilise its value of the yuan. The Chinese government have also clamped down on currency trading and ordered offshore institutions to maintain their yuan holdings.
An alternative view is China is selling their U.S. dollars on purpose. It’s no surprise China has been angered by the U.S. debasing their currency via continuous rounds of quantitative easing. So if China have sold $420 bn of dollars in the last six months it also raises the question who the buyer has been?