The Truth Behind China’s Foreign Exchange Reserves

According to a top central banker, the official foreign exchange reserves of China have very liquid assets. The authorities seek to reassure investors that they are liquid enough to prevent a fall.

Since the Chinese currency’s devaluation in August, investors have negative sentiments amid unparalleled outflows of capital and concerns about the state of their economy. Nations got concerned by the currency policy of China, leading to a global market sell-off early in 2016.

The People’s Bank of China has acted upon its foreign exchange reserves to curb the devaluation of the renminbi. However, several experts believe that the central bank may be forced to get rid of the policy to prevent their reserves from going down on dangerous levels.

Bearish investors have shown skepticism on the reliability of the official foreign exchange reserves data that showed reserves at $3.2 trillion by the end of January. This is still the largest around the world despite dropping for the past 19 months.

According to skeptics, China’s total reserves support the available resources to the renminbi since they believe it still includes illiquid assets like foreign real estate and private equity investments that cannot be directly included in currency markets.

The US hedge fund manager, Kyle Bass, wagered billions as he predicted that renminbi and other currencies in Asia will decline. He believes that the true reserves of China are over $1 trillion less than the official total of the government. George Soros, a veteran investor, also suggest that the renminbi may drop even further.

Besides foreign real estate and private equity, experts questioned China’s recent use of foreign currency to add capital into its state-owned policy banks, which include at least $93 billion that was added to China Development Bank and the Export-Import Bank of China in 2015.

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