China’s three-trillion-dollar question: the yuan or forex reserves?
The central bank is rapidly depleting its foreign cash hoard to prop up the Chinese currency
President Xi Jinping will face a daunting task when he addresses global political and business elites at the World Economic Forum in Davos, Switzerland, later this month.
Xi must show the world that China has not lost control of its pursuit of a stable yuan and is also maintaining sufficient foreign exchange reserves.
For Xi, an ideal situation would be for the yuan to stay stronger than seven to the US dollar and the forex reserves to be above the key level of US$3 trillion.
The central bank will release the figure for the year-end foreign exchange reserves today. If the reserves shrank by more than US$51.5 billion in December, Beijing will find its stockpile below US$3 trillion for the first time since 2011. In November, the reserves fell by US$69.1 billion.
“At the moment, they are keen to both prevent the yuan from
being weaker than seven and the forex reserves from falling,” said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.
It’s a delicate balance. If China wants to keep the yuan from falling too far, it has to intervene in the foreign exchange market.
