How China Lost $1 Trillion
It’s a lot of money — but it’s shrinking.
On Tuesday, China’s central bank said its foreign exchange reserves slipped to $2.998
trillion in January. While they dropped only a modest amount from December, the fall still
put the reserves below the psychologically important $3 trillion level. Three years ago, they
were at nearly $4 trillion.
When they were last at $3 trillion, in early 2011, China’s economy was growing at a much
faster pace — and the central bank’s foreign-exchange reserves were growing rapidly.
What are China’s foreign exchange reserves?
China keeps a firm grip on the value of its currency, the renminbi. For years, that meant
keeping the renminbi steady as vast amounts of the world’s money flooded into the country
to buy the toys, shoes, electronics and other goods it makes.
Under the rules of global finance, that flood of money should have driven up the value of
the renminbi against other currencies, like the dollar. Instead, China kept the renminbi
from rising as a way to help its manufacturers compete abroad. The mechanics of how it
did that are complicated, but the process resulted in China holding large sums of money
denominated in other currencies.
At the peak, in June 2014, the reserves totaled nearly $4 trillion. Inside China, the
foreign exchange reserves have been seen as a financial cushion for times of trouble. But
they have generated deep frustration in places like Washington — including from
President Trump during the campaign.
Why are they now falling?
China is still running huge trade surpluses with the rest of the world, with $40 billion to
$60 billion a month sluicing into the country as exports exceed imports. But the country’s
economic growth has slowed considerably, and that changes the dynamics.
Worries about China’s economy are prompting companies and families to send their
money out of the country for investment or safekeeping. If the Chinese central bank did
nothing, the net outflow of money would cause the renminbi to weaken against the dollar.
Beijing wants to stabilize the value of the renminbi and keep money within its
borders. China’s central bank has been spending billions of dollars from its reserves
each month to prop up the renminbi and slow its weakening. If the renminbi were to
start falling sharply, many families and companies would most likely race to move their
money out of China to minimize their losses. The dwindling reserves are a sign of
China’s efforts to keep money in the country by protecting the renminbi’s value.
Isn’t $3 trillion still a lot of money?
Yes it is. Foreign reserves have not fallen to levels that should sound alarm bells in Beijing
or other capitals. And China has other stores of wealth it can rely on, like a vast pool of
savings. But that does not mean China is out of danger. China still needs considerable
reserves in case it runs into financial trouble. It has the world’s second-largest economy,
after the United States. If many more Chinese families and companies try to swap more
renminbi for dollars, that could swamp the central bank’s ability to prop up the renminbi.
More broadly, the dwindling reserves say something about the direction of the Chinese
economy. It shows that the era when the world rushed to invest in China to build factories
or apartment buildings — generally, to get a piece of the action — is fading.
What does this mean for the United States?
China’s currency is an enigma with which the Trump administration has not yet come to
grips. Based purely on trade flows, the renminbi is still undervalued relative to the dollar.
Each month, China exports about $4 worth of goods to the United States for each $1 of
imports. China’s devaluation of the renminbi in August 2015 further upset American critics
of China who contend that China is rigging its currency.
But by other measures, groups like the International Monetary Fund consider the
renminbi fairly valued. Tensions over the renminbi also put China in an odd position, as
Mr. Trump criticizes China for keeping its currency unfairly weak, even as Beijing tries
to keep it from weakening further.