Chinese reserves fall to 6-year low, outflows to continue - Danske Bank

Allan von Mehren, Chief Analyst at Danske Bank, expressed that the decline in Chinese reserves and the outflow of money from China is a concern. 

Key Quotes: 

“Chinese currency reserves fell below USD3trn in January for the first time since February 2011. FX reserves fell USD12.3bn to USD2998.2bn from USD3010.5bn in December. However, correcting for currency moves (for example, EUR strengthened in January, versus USD lifting the value of euro reserves), we estimate that the adjusted decline was around USD36bn. This is a similar pace of decline as in December and shows that China continues to struggle with capital outflows. If the decline continues at this pace, China will lose around USD500bn of reserves per year.”

“While the decline is not as big as in early 2016, it is still a concern that money keeps flowing out of China. This is part of the reason why the People’s Bank of China pushed up offshore money market rates in December and January, to make it more expensive to short the CNH, the Chinese offshore currency.”

“We expect outflows to continue as the Chinese economy is under significant
structural pressure from too much debt and too many investments. Although China is taking measures to dampen outflows by tightening controls, we believe a gradual outflow is still likely.”