China has generated a large amount of controversy and speculation on the forex markets of late of late, with its economic policies creating a tumultuous and volatile few months for the nation’s currency.
Indeed, the last few days have seen the country’s foreign reserves – the largest on record – fall to an astonishing three-year low. With the eyes of the world firmly glued on this eastern powerhouse, we assess the veracity of the nation’s claims that reserves remain ‘relatively abundant’…
A Three-Year Low
Recently, China’s foreign reserves have experienced an extreme dip, falling to a three-year low. This is not the first time in the last few months that severe depreciation in the value of reserves has been witnessed. November also marked a cataclysmic drop, which totalled 87.2 billion dollars.
With a 107.9 billion dollar shortfall to explain, ministers claim that the US interest rate hike is the key cause, and remain firm in their conviction that reserves are still ‘relatively abundant’.
Arguably, their statement holds a good deal of truth. Despite the record monthly fall, the State Administration of Foreign Exchange (SAFE) estimate that its reserves still amount to 3.3 trillion dollars, making them the largest in the world.
Despite this mammoth depreciation, and the drop of the yuan to a five-year low this week, China remains the largest holder of foreign exchange reserves, and SAFE has shrugged off all concerns from investors, commentators, and other anxious parties.
In a statement released by the organisation, they said that the fundamentals of the Chinese economy remain strong, and that “generally speaking, China’s financial system is stable and healthy.”
They also made clear their intention to encourage and facilitate cross-border trade and investment, and outlined their desire to promote the currency’s convertibility.
Additionally, SAFE stated an intent to re-strengthen the monitoring of the country’s balance of payments, as well as an aim to assess, evaluate, and improve its regulation of foreign debt and cross-border capital flows.
Focusing on the Future
It is not only SAFE which is looking at ways to remedy the Chinese situation. The nation itself is proving hands-on in its search for a solution, and many of these centre around reinvigorating its export market.
This focus has been catalysed by a pattern of decline in this area. The trend has prompted a whole host of reforms, some of which are already being implemented, and which aim to turn the country’s export dependent economy into one with a greater emphasis and reliance on consumption.
Additionally, overseas direct investment has also been vamped up, which has seen Chinese companies invest 104 billion dollars in foreign ventures over the past 11 months.
With a proactive approach to currency depreciation, a host of experts warning investors not to underestimate the Chinese economy, and a plethora of reforms already in place, could it be that China is set to turn its fortunes around in 2016?