Foreign exchange reserves above US$2.6 tn do not pose a threat to China's balance of payments, says Liang Hong 梁红, citing calculations made by her team at China International Capital Corporation.
The fact that forex reserves have fallen below the psychological threshold of US$3 tn does not mean that they are not fundamentally sufficient, says Liang.
Current levels fulfil the majority of traditional indicators used to evaluate reserve adequacy, says Liang, including three months' imports, short-term loans and the IMF's comprehensive adequacy indicator, says Liang. It does not provide sufficient cover for broad money or M2, says Liang, but neither would reserves of US$4 tn.
Forex reserves dropped for the seven consecutive month to US$2.998 tn in January 2017, falling by US$12.3 bn from December 2016. The rate of decrease slowed, partially the result of a weakening USD, which dropped 2.6 percent against a basket of currencies in January 2017.
Transactions by individuals accounted for the majority of outflows in January, says Liang, as the US$50,000 foreign exchange limit was renewed and citizens acquired foreign currencies to travel abroad during Chinese New Year. In comparison, transactions by institutions contributed to a small portion of capital outflows as restrictions on overseas M&A and FDI appeared to take effect.
If the economy expands steadily, monetary easing will slow and RMB depreciation will recover, says Liang, when this happens, export enterprises that have not remitted or settled funds in foreign currency will do so. The RMB may experience some pressure in the short term, says Liang, however current reserve levels are more than sufficient and there is limited room for further decline.