The Three Major Factor For China'S Foreign Exchange Reserves To Fall Is The Fuse.

China's foreign reserves contracted for 4 quarters, falling in the first quarter, accounting for half of the emerging market.

Global reserves are being substantially reduced, especially in emerging markets.

In the first quarter of this year, the total external reserves of emerging market countries decreased by 222 billion US dollars to 7 trillion and 500 billion US dollars, according to the Wall Street journal analysis of IMF data.

The 3% decline is also the largest percentage decline in external reserves in the single quarter since the first quarter of 2009.

Of which China

The decline in the first quarter of this year accounted for half of the overall decline in the emerging market, reaching 113 billion US dollars.

According to experts, China's foreign exchange reserves have been growing for a long time, and such a decline in the short term has been rare for more than 20 years, resulting from the superposition of a series of factors, such as the strength of the US dollar, capital outflow, the valuation effect caused by exchange rate changes, and China's launch of the "one belt and one way" strategy.

In addition, some analysts said that the central bank sold dollars in the foreign exchange market to ensure that the renminbi did not depreciate, reflecting the devaluation pressure of the renminbi.

China's external reserves contracted for 4 consecutive quarters

China's foreign exchange reserves have declined for 4 consecutive quarters since the 3 quarter of last year, down from the peak of 3 trillion and 990 billion dollars a year ago to 3 trillion and 690 billion US dollars in June this year.

CICC's latest report indicates that there may be three major factors leading to this result.

First, foreign exchange intervention.

From the continuous deficit of capital account, the pressure of recent capital outflow seems to be more obvious.

The central bank should have implemented foreign exchange intervention measures, buying Renminbi in US dollars and stabilizing the local currency exchange rate.

Since December last year, the renminbi in the offshore market has seen a significant devaluation pressure against the US dollar. However, the RMB depreciation rate in the offshore market is smaller than that in the offshore market, and the central parity of the RMB against the US dollar is relatively stable.

In the fourth quarter of last year and the one or two quarter of this year, the amount of foreign exchange held by the central bank was reduced by 133 billion 700 million yuan, 252 billion 100 million yuan and 101 billion 100 million yuan respectively.

Second, foreign exchange investment.

Foreign exchange loans and some high-yield securities may not meet the liquidity or safety standards of foreign exchange reserves, so they are removed from the foreign exchange reserve data.

Foreign exchange investments similar to private equity for banks and policy institutions no longer belong to foreign exchange assets of monetary authorities.

For example, in November 2014, China established the Silk Road Fund, and the central bank invested 6 billion 500 million US dollars in foreign exchange reserves.

Recently, the central bank has recently injected $48 billion into the National Development Bank, and will inject $45 billion into the export and Import Bank of China to promote the reform of policy banks.

Third, the valuation effect.

A stronger US dollar may reduce the US dollar value of foreign exchange reserves in the non US dollar portion.

Because in the case of the depreciation of the dollar, the dollar denominated reserve assets will increase.

In the case of the appreciation of the US dollar, the US dollar denominated assets will decline.

Foreign exchange reserves may also take various investment gains and losses.

In contrast to the value of RMB and US dollar in foreign exchange reserves, China Gold estimates that the valuation effect since last June may reach US $219 billion 200 million.

The decline in foreign reserves also involves passive capital outflows, including arbitrage capital or the outflow of hot money and the divestment of foreign-funded enterprises. What is particularly alarming is the phenomenon of capital flight outside the monetary authority's statistical control.

In the second half of 2014, China's foreign reserves dropped by US $150 billion, but the merchandise trade surplus reached US $278 billion 500 million.

In the first quarter of this year, foreign reserves dropped by US $113 billion, and the merchandise trade surplus was US $123 billion 700 million.

The gap between them has enlarged the space for capital outflow.

The trend of foreign reserves is down but not enough in the short term, but long-term capital outflow needs attention.

Overall, China's foreign exchange reserves are large and far above the "moderate" level because of previous accumulation, so its short-term decline is not enough.

However, it is noteworthy that the trend is the problem.

In recent years, the turmoil of world economy and international finance has reversed the unilateral upward trend of long term foreign exchange reserves.

What is the future impact of this change on macroeconomic and financial stability?

Especially the phenomenon of speculative capital outflow and capital flight.

In the week ending June 17th this year, emerging market funds outflow $2 billion 100 million, of which China's ETF outflows $1 billion 600 million, according to Citibank.

In the week of June 17th, $10 billion 800 million flowed into equity funds, mainly to the US and Japan funds.

Overall, China's balance of payments is huge.

"The pattern has come to an end, instead of the" new normal "of current account surplus and capital account volatility.

As far as the current account is concerned, the trade between goods and services is increasingly widening: the former continues to maintain a huge surplus, while the decline in basic commodity prices has become an important factor. The deficit of the latter is expanding at an alarming rate and is evolving towards an unsustainable direction.

However, Chinese officials have consistently denied massive capital outflows.

At a conference last Thursday, the safe stated clearly that there was no sustained massive capital outflow in the first half of the year and the two quarter external pressure weakened.

Wang Chunying, a spokesman for the safe, said: "from the data we are currently grasping, there has been no sustained massive capital outflow in the first half of the year, and the pressure of outflow of funds in the two quarter has weakened and tends to be balanced in the first quarter."

In addition to capital outflow, CICC believes that foreign exchange reserves in the strict sense of the future may continue to decline.

With the internationalization of RMB, the elasticity of RMB exchange rate and the gradual withdrawal of foreign exchange intervention, China's foreign exchange reserves will continue to decline in proportion to GDP.

At the same time, China may continue to use foreign exchange reserves to support the long-term development strategy of the country.

Therefore, strict foreign exchange reserves may continue to decline.

In accordance with the interpretation of the CIC, strict foreign exchange reserves must meet certain liquidity and security requirements, usually held in the form of convertible foreign currency claims, including foreign currency cash, bank deposits, treasury bonds, short and long term.

And other foreign currency assets that can be used for international payment.

Foreign exchange assets held by other government agencies, including sovereign wealth funds, are not included in the strict sense of foreign exchange reserves.

Before that, China has nearly $1 trillion in foreign exchange reserves to support the strategic development and investment of the country. Some of these assets are held by other government agencies, including foreign exchange reserves in the banking reform, capital investment in the banking industry, the establishment of China Investment Corporation, lending to policy banks in the form of foreign exchange entrusted loans, capital contribution to the Silk Road Fund, and capital increase to IMF.