BOFIT Viikkokatsaus / BOFIT Weekly 2017/06

At the end of January, China's foreign currency and gold reserves stood at $2.998 trillion, or about $1 trillion less than at the summer 2014 peak. The contraction in the forex reserves shows that China's foreign trade surplus is not sufficient to cover its net outflow of capital.

Depreciation expectations on the yuan currently drive the increased outflow of capital from China. To influence expectations, China's central bank has sold currency in the forex markets to quell yuan depreciation. The PBoC has also sought to stem the outflow of capital through stricter capital controls, while making it easier to invest in China.

The value of China's reserves fell by $12 billion in January, which was considerably less than the $50-billion-per-month average of October to December. While tighter regulation and heavy-handed intervention in currency markets seem to have achieved their objectives for the time being, they represent a set-back for Chinese reforms and do nothing to solve fundamental issues related to the current situation.