China’s January FX Reserves Down…Counter-Measures Likely after Luna New Year (Current Issue No. 2817)

It is expected that China will face significant hurdles in supervising the Yuan volatility throughout 2017 amid continuing economic slowdown. The first test will likely be during the Chinese New Year at the end of January when its forex reserves may falter below USD3 trillion.

This represents an important psychological level where any resulting forex volatility could force China to implement additional measures to supervise capital movements. Delaying action towards economic structural imbalances would put its capital market under heightened stress going forward, thus becoming an important variable that could steepen volatility in other Asian markets over the remainder of 2017, as well.

For the time being, however, China, still has adequate resources to contain that problem and maintain investor confidence in the long term. Currently, China's forex reserves are not a cause for much concern. The safety level in forex reserves as denoted by the International Monetary Fund (IMF) minimum requirement, i.e., not be less than 150 percent of a nation's short-term debt, or not less than 10 percent of M2 is at least USD1.5-2.0 trillion. In addition, China's 6.8 percent GDP growth reported for 4Q16 should ease some concern toward any risk of a hard landing. China may also address such imbalances by freeing up its financial market (in tandem with the slowing economy, in order to cut market intervention costs).

Any impact on Thailand would be limited because China still has sufficient resources to ensure that its financial market returns to normalcy and the fact that Thailand's external stability remains relatively robust. However, Thailand must prepare for possible volatility, especially if President Donald Trump signals a new trade stance vis-à-vis China, as well as any retaliatory measures China might pursue against the US.