Re­serves no cause for con­cern

China Daily (Canada) - - LIFE -

China’s for­eign ex­change re­serves dropped to $2.99 tril­lion in Jan­uary, fall­ing be­low the $3 tril­lion level for the first time since early 2011. Re­serves of $3 tril­lion were claimed to be the psy­cho­log­i­cal bot­tom line for in­vestor con­fi­dence by some peo­ple, who thought dip­ping be­low that would cause in­vestors to panic.

How­ever, there is no need to worry, given that China’s in­creas­ingly di­ver­si­fied for­eign ex­change bas­ket at a time of a weak dol­lar has helped main­tain its for­eign ex­change sta­bil­ity and there is no pos­si­bil­ity of large-scale cap­i­tal flight.

The cen­tral bank cites the sup­ply of for­eign ex­change funds as one of the main rea­sons for the re­cent de­cline in the coun­try’s for­eign re­serves. This gets to the point, as there is usu­ally an in­creased de­mand for for­eign cur­ren­cies dur­ing Spring Fes­ti­val be­cause many peo­ple visit over­seas des­ti­na­tions dur­ing the hol­i­day, which be­gan in late Jan­uary this year.

Data from travel num­ber cruncher For­wardKeys in­di­cates that the num­ber of Chi­nese who made over­seas trips in Jan­uary grewby 9.8 per­cent year-on-year. Stricter re­quire­ments on pur­chas­ing the $50,000 an­nual for­eign ex­change quota re­leased in Jan­uary­may have also prompted some to go ahead with the pur­chase.

That the coun­try’s for­eign re­serves are be­low $3 tril­lion should not be a source of worry. A de­cline of $12.3 bil­lion is not big, and the tar­geted re­sponses the cen­tral bank has made to the yuan’s ex­change rate fluc­tu­a­tions in­di­cate that it has suf­fi­cient means to deal with short-sellers of the yuan.

Any fluc­tu­a­tions of a coun­try’s for­eign ex­change re­serve within a cer­tain range are nor­mal, and China’s cur­rent re­serves, al­though be­low $3 tril­lion, are still the world’s largest. In a com­plex and change­able eco­nomic and fi­nan­cial en­vi­ron­ment at home and abroad, one should not ar­ti­fi­cially set a “psy­cho­log­i­cal limit” for China’s for­eign ex­change re­serves.

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