In January 2017, China's foreign exchange (FX) reserves fell to less than USD3 trillion for the first time in six years. This decline in its FX reserves over recent years has been primarily due to capital and financial account deficits, as well as FX market intervention.
China's capital and financial account deficits have been driven by steady growth in international asset investments,e.g., direct outward investments, or international financial transactions in search of investment opportunities abroad. In addition, the US Fed's policy rate normalization and President Trump's “America First” policy have precipitated greater capital outflows from China, beginning at the 2016 yearend.
We at KResearch are of the view that if China's policies to ensure the stability of the Yuan (CNY) and its FX reserves are sufficient, capital outflows should decelerate somewhat during 2017. Thus, its FX reserves may reach perhaps USD2.8 trillion by the 2017 yearend, if China does not introduce any new broad-based measure to supervise their currency, and lean towards fine-tuning existing measures specifically to maintain the Yuan stability during the year.
Nevertheless, financial markets will continue to be plagued by uncertainty, given President Trump's “America First” policy that may induce multi-national companies to relocate production facilities away from China, or if there are accelerated and frequent Fed Funds rate hikes that could cause the Yuan to weaken further than earlier assessed. If that happens, increased capital outflows would again become a worrisome issue facing China. The Chinese authorities, therefore, might then introduce more stringent measures to maintain the Yuan stability; as such, this matter warrants close monitoring, ahead.
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