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Market Digest Nigeria

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China’s Foreign Exchange Reserves Plunge

China’s foreign exchange reserves fell below $3 trillion for the first time since May 2012 last month, sparking fears that the country may fall below the threshold recommended by the International Monetary Fund (IMF) and further endanger the health of the global economy.

The seventh consecutive monthly decline came after the Peoples Bank of China continued to aggressively sell dollars and imposed a wide range of other measures to curb the fall of the Renminbi. Policymakers embarked on such a strategy fearing a weakening currency would hurt Chinese businesses, many of which hold debt in dollars, and destabilise the economy.

At $2.998 trillion, the amount of foreign currency held by the Bank is now well below the level reached in June 2014. Back then, reserves peaked at $3.99 trillion, while a large chunk of the world’s money rushed to invest in China and buy its cheaper goods.

Some economists worry that the speed at which China’s foreign exchange ammunition is falling will make it increasingly difficult for its government to defend its currency and capital outflows. The rapid disappearance of this big financial cushion for the world’s second largest economy has already shaken emerging markets and commodity currencies, driven by fears that a poorer China will buy fewer commodity goods.

China is the world’s biggest consumer of commodities, and the driving force behind the majority of investments in capital goods over the past decade. Signs of falling foreign capital in the country could have wide implications for the global economy.

The IMF estimates that China requires at least $2.6 trillion of foreign exchange reserves to facilitate its ability to import and export goods. Should Donald Trump decide to impose trade sanctions on China, the U.S.’s biggest creditor and trading partner, the Chinese war chest and currency is likely to come under further pressure.

 

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