Chinas’s Forex Reserves Fall Bringing Serious Financial Worries to the Nation

Certainly, it is an unfortunate hour for China, as the exchange reserves of the nation have fallen very low. According to the media reports, the reserves fell lowest in the past six years in December leaving the nation baffled. The amount was held just able $3 trillion level. However, the authorities have involved themselves in supporting the weakening Yuan.

It has been seen that the reserves of the nation have come down by $41 billion in the last month. Nonetheless, it is still less than what was expected by the experts. The data has also highlighted the fact that the authorities of Beijing are planning to take serious steps against the ones betting against the currency, as it makes it tough for the currency to move out from the nation.

The Fall of China’s Currency

When it comes to the entire year, the reserves have come down $320 billion to $3.011 trillion, which is the highest decrease in 2015. It has created great concerns in the global financial markets of Beijing. The concern is about China’s decreasing power to defend its currency and remaining faithful to the capital outflows.

In addition to this, the financial analysts have highlighted the fact that the nation needs to have a minimum of $2.6 trillion to $2.8 trillion to fulfill the policy of International Monetary Fund. Further, it is clear that China will remain strict towards the outflows made through the regulatory means if the pressure on the currency persists. It will also discourage the short sellers in the forex market from making unnecessary bets against Yuan.

The Fear of Devaluation

Some of the great strategists’ fear that China might have to sanction devaluation like it did in the past year if the nation will continue to shrink its reserves. If this happens, then it is likely to agitate the global financial market and will give rise to tensions with the new US president, Trump. While comparing Yuan to the US dollar, it has depreciated by 6.6 percent, which is certainly an alarming situation. Since the year 1994, the current loss is the highest and has weakened the nation.

Adding to the woes of China, it was seen that Donald Trump made it clear that he would tag China as the currency manipulator. He did this on the very first day of his office, which is not good news for China. He also added that huge tariffs might be imposed on the imports of Chinese goods in the nation. On the other hand, China has now become keen to get its money out of the nation.

In the Words of Chang Liu

The China economist, Chang Liu has clearly mentioned in an email to Reuters that the nation expected the total capital outflows to be around $710 billion in the year 2016. The net outflows in November and December were estimated to be at $76 billion and $66 billion respectively. He added that the real figures have actually gone down and it is because the central bank held the responsibility to stabilise the Yuan. He mentioned that the other currencies of China are also decreasing against the rise of dollars.

The Solution

The only solution China considers is to curb the capital outflows. The nation today needs to have a strong grip over its currency with the election of Trump. The regulators have put restrictions on the people and organizations that are planning to move funds out of the nation while the State banks are bringing in Yuan. Therefore, it can be said that China is facing a very serious financial issue this time and is making all the attempts to get over it.