BOFIT Viikkokatsaus / BOFIT Weekly 2017/02

Since 2014, China's large trade surpluses have not been sufficient to cover the deficit caused by capital outflows. Even with a brief idling period in the first half of 2016, China's foreign currency reserves have been shrinking steadily. Last year reserves declined by about $320 billion.

The reduction in reserves poses no threat to China's external liquidity. Reserves are still large relative the country's short-term foreign debt and value of imports. Nevertheless, the outflow of capital, shrinking reserves and depreciation pressure on the yuan feed a vicious cycle that leads to recurring market disturbances and further tightening of capital controls that make the current situation untenable.