$10 billion here. $10 billion there. And soon you’re talking about real money.
China’s foreign exchange reserves fell $69.1 billion in November to $3.05 trillion, the People’s Bank of China said today. That follows on a $47.5 billion drop in October. And it marks the fifth straight monthly decline. China’s foreign reserves have fallen almost $1 trillion from a record $4 trillion in June 2014.
With the in-coming Trump administration seemingly just chomping at the bit to brand China a currency manipulator, the question is Can China get its currency outflows under control using tighter rules on capital controls or will it have to devalue the yuan?
Certainly China’s financial regulators are trying the capital controls route. They’ve slapped a new $5 million limit on companies seeking to send money out of China. Any transfer above that level–say to pay a dividend or repay a loan from a Chinese unit back to a company’s headquarters in Europe, Japan, or the United States–will require official approval. The chances of getting such approval seems remote at the moment, the EU Chamber of Commerce said in a statement yesterday.
The big drawdown in China’s reserves comes from efforts at the People’s Bank to support the yuan by selling dollars in an attempt to drive down the dollar against the yuan. The problem is, as other currency crises have shown, once individuals, companies, and institutional investors decide that a currency is headed downward, it’s just about impossible for a central bank to buy and sell its way to reversing the trend. The pressure on the yuan is due to spike too as Chinese households, limited to $50,000 a year in currency transfers, see their annual quotas renewed beginning in January. A Federal Reserve interest rate increase on December 14 that strengthens the dollar will make the People’s Bank’s job harder as well.
And so does every tweet out of President-elect Trump that hints at a trade war. (Don’t discount a certain amount of confusion at the Chinese end either as the fall of 2017 brings an overhaul of the Chinese Politburo at the end of the Communist Party congress.)
Which leaves China caught in a bind where every bit of news that hints at a devaluation of the yuan is likely to bring a reaction from Washington that leads to more downward pressure on the yuan.
The odds seem to be rising, at least that’s how I read the bread crumbs from Beijing, of a big one-time devaluation of the yuan. That, the thinking goes, would end the drop in the yuan and prevent a continued drip-drip-drip devaluation that could turn into a currency crisis.
The numbers I’ve heard suggest that a 20% one-time devaluation of the yuan would do the job.
You can imagine exactly how that would go over with the Trump administration.