China’s Foreign Exchange Reserve Actually Fell In September15 October, 2011, 3:55. Posted by Zarathustra
Tags: Chinese Yuan, Economy, FX Reserve
I missed this bit previously, but foreign exchange reserve of China actually fell in September compared to August, while it is kind of flat for the quarter.
While this should be an expected outcome if the economy slows with trade surplus narrowing and possibly less capital inflow (or even outflow), the surprising bit to me is that it is already happening in September. Of course, this might be just a blip for the month as it was a very turbulent month, but it could be very interesting (and ominous) if this is not a blip.
Note that the accumulation of foreign exchange reserve is a consequence of the trade policy and partial capital control which prevents Chinese Yuan from appreciating too quickly while at the same time allow persistent trade surplus and capital inflow, and the increase of foreign exchange reserve is accomplished by the issuance of money, which is the key reason for the persistently excessive liquidity. Thus if the reverse happens (i.e. if FX reserve falls), the issuance of money could go into reverse, and that would introduce more tightening bias towards monetary policy, and that could be even tighter than raising interest rates and/or reserve requirement ratio.
Source: People’s Bank of China