China is one of the countries with the largest currency reserves around the globe. In spite of owning huge currency reserves, the country has been expending them so quickly that some financial experts are wondering how long it will take before China is forced to make tough decisions. Beijing will have to choose between giving up selling of dollars to prop the yuan (renminbi) and going for fresh capital controls.
China central bank deflects concerns over forex reserves
In an effort to reaffirm confidence in the strength of the falling yuan, Ying Gang, China’s central bank vice-governor, downplayed fears over forex reserves. The vice-governor told Xinhua; the state news agency that reductions in the country’s forex reserve was down to higher holding by individuals and companies. The country’s forex reserves fell by $99.5 billion early this year to $3.23 trillion. Reserves declined by $762 billion by mid-2014.
During the televised interview that was held immediately after the meeting with G20 financial ministers in Shanghai, Yi Gang said “The reduction in foreign exchange reserve occurred because individuals increased their holdings while reducing their foreign exchange debts. This is a limited process and capital flight will subside with time.”
According to the central bank’s vice-governor, Beijing is still enjoying direct foreign investments and high trade surplus which results in fast capital inflow. Beijing is confident in the basics of Renminbi and believe its exchange will be decided by market forces compared to short-term speculations, Yi said.
Though China has experienced some fluctuations, the Chinese currency has maintained a strong stand against other currencies .Essentially, fluctuations seems to have been driven partially by short term speculation.
Yi’s assurances come in the wake of growing concerns by China’s trading partners on whether the country is still capable of managing its economy and currency. As Chinese officials try to calm fears about the declining yuan and their economic policies, the jury is till out there on whether the reassurances from Beijing will hold true.