China: Falling reserves shows rising vulnerability - Danske Bank

Analysts from Danske Bank, explained that the drop in Chinese FX reserves in November was the biggest since January. They continue to see high risk of financial turmoil in 2017. 

Key Quotes: 

“Chinese FX reserves for November fell more than expected to USD3051.6bn - a decline of around USD69.1 bn. Reserves have not been lower since February 2011.”

“It was the biggest drop since January this year, when outflows were very high. However, a big chunk of the decline was due to valuation effects, as most currencies weakened against the USD in November, lowering the value of non-USD reserves (USD index increased 3.3% in November). We estimate adjusted reserves fell USD40bn, which is still the biggest drop since January, pointing to increased intervention from the PBoC recently into the depreciation of CNY versus the USD.”

“Chinese reserves have fallen a total of 25% from the peak in 2014, shaving off USD1trn out of the USD4trn reserves it had in 2014. Hence, even though reserves are still high, they can fall quite rapidly. This is probably the reason why China is now tightening capital controls.”

“Although it has been calm around China since the start of the year, we continue to see a high risk that financial turmoil could return in 2017, when growth is expected to slow down again. We continue to recommend short CNH as a hedge against a potential crisis and hedging of CNY receivables.”