China’s Foreign Exchange Reserves Fell By $9 Billion In November

U.S-China trade war was expected to affect the economies across the globe but the fact that the biggest hit would be reserved for China was a widely shared opinion. Despite this when the report name exceeded the expectations of all the experts, who had predicted loses but none of this size. China’s Foreign Exchange reserves fell by $9 billion, while the country’s balance of payments surplus continues to evaporate with exports down and imports up.

Why no one saw it coming

Experts over at Wall Street had predicted only a $2 billion decrease in China’s foreign exchange reserves, While Analysts polled by Reuters had the expectations that the world’s largest fall would be $4 billion, but the reality turned out to be much more gloomy for China.

This was especially unexpected because despite the tense negotiations that seem to be stuck in a deadlock. Slowly the Chinese economy started to get back on its feet. The reserves started to increase gradually since late 2018. The growth was prompted by tight capital controls and rising inflows from foreign investors. So it’s easy to see why nobody anticipated such a drastic drop. Yuan, itself has been quite unpredictable all throughout the trade war fluctuating heavily during the 17 months that the U.S-China negotiations have been going on.

Over the duration of the Trade-War, China has been losing roughly $4 billion per month in exports, but China does not seem too inclined to take any sort of offer US will put on the table. Now China is allowing onshore bonds as collateral in short-term forex borrowing, While the US  economy thrives and bears no signs of serious damage. Amidst the biggest economic slowdown China has seen in over 30 years, it will aim to lower funding costs and facilitate lending.

This summer saw the big turnaround for China, as Yuan started to rise steadily for three months straight as the agreement between the US and China was seemingly underway. But it took a big dip in December as the bilateral relationship started to escalate.

China’s recovery strategy

The State Administration of China didn’t want to draw too much attention to the loss and said that change in global exchange rates and asset prices were to blame for the big loss, including the value of China’s 62.64 million troy ounces of gold reserves that gell by roughly 3 billion.

FX in China is a complicated topic. Household foreign exchange trading has been quite underwhelming, because of the restrictions on the cross-border capital controls and a ban on currency margin trading. But Foreign brokers are a different story. Local trading currencies online on platforms owned and operated by foreign brokers manage to escape some of the regulations because they operate offshore. To find the best forex broker you have to look extra hard.

Overall the attitudes towards trading are positive among the locals who attend exhibitions and public lectures on trading skills that are organized by trading first interested in China’s market. In 2016 the average forex trading would make up about 31$ billion, accounting for 7% of the global economy which supported the attitude that China’s forex was full of potential. The actions that China has already taken to recover from the huge loses might do some improvements but until US-China relations become more stable it seems like the inconsistencies and unpredictable economic state will follow China.

This is a complicated topic because the from forex reserves drop to addition tariff that might be coming in China’s way, the country still calls for respectable, leveled negotiations. The country is determined to stand its ground and will not allow the US to have superiority when it comes to negotiating face to face. China above all wants to be respected and recognized for its role in the global economy. The additional tariffs are set to go in fore on December 15 so China still has a couple of days to prepare for the talks and the possible consequences. It is interesting whether or not this huge loss will affect China’s position at all. The additional tariffs will cover the 15% increase on $160 billion of Chinese exports. China made a “peace offering’ with lifting some of the tariffs on US goods like some U.S soybeans and pork.

Although the numbers seem daunting this isn’t the first huge crisis China has had to deal with in this decade. Back in 2015-2016 Chinese policymakers lost $1 trillion, trying to support the yuans. Since China managed to recover from the loss by trimming interest rates and making further cuts in different areas, it’s possible that the country will make the same moves although less drastic considering the smaller loss in the reserve.

Meanwhile, the US has seen a 266,000 rise in employment in November, which is higher than the last 6-month average. While China aims for even playing ground with these statistics it is likely that the US will try to get the best deal possible for itself, since it has seen the tariffs have made a big impact on China’s economy.