Tags: Chang | China | yuan | dollar

Forbes' Chang: China's Giant Piggybank of Forex Reserves Could Be Running Out

By    |   Tuesday, 28 April 2015 06:40 AM

China might be secretly spending up to $100 billion per month to defend its currency, according to Forbes contributor and China expert Gordon Chang.

While the yuan might look healthy because it is up 0.4 percent against the dollar in 2015 after falling 2.5 percent last year, there are problems below the surface, he noted.

"Even if China's foreign exchange reserves are as large as Beijing reports — unlikely — and even if all the holdings are as liquid as claimed to be — also doubtful — China can burn through its large pile of forex faster than anyone can now imagine," Chang wrote in a Forbes column.

"In a year or two the mound of dollars, euros and yen can be depleted."

Chang said that data from Carlo Reiter of Beijing-based J Capital Research suggest that the Peoples Bank of China (PBOC) sold between $56 billion and $106 billion in foreign exchange in February to protect its currency.

"His logic is simple," Chang explained. "The central bank, unless it wants to shrink the money supply, has to lend out additional funds whenever it sells dollars for yuan. As he explains, for each dollar the PBOC sells, it takes about 6.2 yuan out of circulation."

Change estimated the central bank escalated its foreign exchange sales in March to defend its currency, as the government conceded it sold $113 billion in the first quarter, leaving $3.73 trillion in its coffers.

"That figure, however, seems too high. In March, outflows of capital increased and so did the value of the renminbi against the dollar. That means, in all probability, central bank intervention skyrocketed during the month."

He noted that while China has stringent capital control laws, money still managed to pour into the country unchecked in recent years during the nation's go-go economic growth period.

"Now that greed is turning into fear, it's unlikely officials will be more able to stop illegal currency flows," he predicted.

The Financial Times reported China will spend about $62 billion of its foreign currency reserves on a "New Silk Road" strategy to build roads, railways, ports and pipelines in Asia and the Middle East to reach foreign markets and ease overcapacity at home.

"Increased foreign currency lending would likely also help China boost financial returns on its forex reserves, which are now mainly invested in low-yielding US Treasurys," the Times said.

But The Wall Street Journal noted that "hot money" inflows of speculative capital that helped inflate China's property bubble and shadow banking industry now may have one foot out the door.

"There is a legitimate fear that China's new mega-rich will yank their money out as soon they sense the yuan is falling. Already, surveys show these people are losing confidence in the economic outlook, which is why they are putting their money into property in New York, London and Sydney," The Journal said.

"If capital flight accelerates and the yuan plunges, dollar debts will become hard to pay. The PBOC could draw on its giant reserves to avert a crisis, but the financial instability would be unsettling and would severely challenge the government's twin goals of rebalancing the economy and turning the yuan into an international currency."

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China might be secretly spending up to $100 billion per month to defend its currency, according to Forbes contributor and China expert Gordon Chang.
Chang, China, yuan, dollar
Tuesday, 28 April 2015 06:40 AM
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