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Monday 29 December 2008
Capital Outflow Could Cause China to Sell US Treasury Bonds
Director of the External Debt Department of the State Administration of Foreign Exchange Cai Qiusheng recently revealed that China’s foreign exchange reserve had dropped to under $1.9 trillion.
Capital Outflow Could Cause China to Sell US Treasury Bonds
CSC staff, Beijing 24 December 2008
Director of the External Debt Department of the State Administration of Foreign Exchange Cai Qiusheng recently revealed that China’s foreign exchange reserve had dropped to under $1.9 trillion.
It is reported that China’s foreign exchange reserve balance dipped under $1.89 trillion at the end of October. Since at the end of September this number was $1.9056 trillion, in October China’s foreign exchange reserve dropped by at least $15.6 billion. This is the first decrease since December 2003, when China’s foreign exchange reserve fell due to a government injection of foreign exchange into the Bank of China and China Construction Bank.
Standard Chartered economist Stephen Green says China’s foreign exchange reserve slide in October may have been due to many factors such as foreign capital withdrawal and expectation for RMB depreciation. By analyzing the balance sheet of People’s Bank of China (PBoC), China’s central bank, Green roughly estimates China’s capital outflow to be $5 billion in October, and $700 million to $1 billion in September. Besides, due to the expectation for RMB depreciation, exporters and other foreign exchange gainers may be holding USD instead of exchanging them for RMB.
RMB’s depreciation against USD on December 1 triggered disputes on the market, but in fact, depreciation expectations entered the NDF market in Hong Kong in September and stuck around in October.
China has long worried about foreign capital withdrawal. A sharp and continuous outflow will not only seriously affect China’s financial industry and real economy, but PBoC will also be forced to sell off foreign exchange assets, such as US treasury bonds, in order to meet international settlement demand, which would put deadly heat on the international financial market, especially the US national debt market.
Financial Research, a PBoC academic magazine, published a thesis in 2007 stating that even the withdrawal of $200 billion of overseas capital would seriously harm the Chinese and international markets because such a withdrawal would mean that real estate assets or stocks worth about 1.7 trillion yuan would have to be sold, while China’s central bank would have to sell $200 billion of assets to meet the demand of foreign exchange purchase on the market. This would undoubtedly affect international financial markets.
Many countries, such as Korea, India and Russia, have seen a sharp decline in foreign exchange reserves during the present financial crisis and their central banks have been forced to cut their holdings of international assets. Perhaps now it is China’s turn.
With the continuous slowing of the Chinese economy since November, and quite strong expectation for RMB depreciation, the foreign exchange reserve decrease may deepen, and the influence of capital outflow on the Chinese and overseas market will emerge.
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Capital Outflow Could Cause China to Sell US Treasury Bonds
CSC staff, Beijing
24 December 2008
Director of the External Debt Department of the State Administration of Foreign Exchange Cai Qiusheng recently revealed that China’s foreign exchange reserve had dropped to under $1.9 trillion.
It is reported that China’s foreign exchange reserve balance dipped under $1.89 trillion at the end of October. Since at the end of September this number was $1.9056 trillion, in October China’s foreign exchange reserve dropped by at least $15.6 billion. This is the first decrease since December 2003, when China’s foreign exchange reserve fell due to a government injection of foreign exchange into the Bank of China and China Construction Bank.
Standard Chartered economist Stephen Green says China’s foreign exchange reserve slide in October may have been due to many factors such as foreign capital withdrawal and expectation for RMB depreciation. By analyzing the balance sheet of People’s Bank of China (PBoC), China’s central bank, Green roughly estimates China’s capital outflow to be $5 billion in October, and $700 million to $1 billion in September. Besides, due to the expectation for RMB depreciation, exporters and other foreign exchange gainers may be holding USD instead of exchanging them for RMB.
RMB’s depreciation against USD on December 1 triggered disputes on the market, but in fact, depreciation expectations entered the NDF market in Hong Kong in September and stuck around in October.
China has long worried about foreign capital withdrawal. A sharp and continuous outflow will not only seriously affect China’s financial industry and real economy, but PBoC will also be forced to sell off foreign exchange assets, such as US treasury bonds, in order to meet international settlement demand, which would put deadly heat on the international financial market, especially the US national debt market.
Financial Research, a PBoC academic magazine, published a thesis in 2007 stating that even the withdrawal of $200 billion of overseas capital would seriously harm the Chinese and international markets because such a withdrawal would mean that real estate assets or stocks worth about 1.7 trillion yuan would have to be sold, while China’s central bank would have to sell $200 billion of assets to meet the demand of foreign exchange purchase on the market. This would undoubtedly affect international financial markets.
Many countries, such as Korea, India and Russia, have seen a sharp decline in foreign exchange reserves during the present financial crisis and their central banks have been forced to cut their holdings of international assets. Perhaps now it is China’s turn.
With the continuous slowing of the Chinese economy since November, and quite strong expectation for RMB depreciation, the foreign exchange reserve decrease may deepen, and the influence of capital outflow on the Chinese and overseas market will emerge.
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