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How Much More China’s Foreign Reserves Can Fall

Now that China’s pile of foreign reserves has dipped below $3 trillion, the first time its been below that level since 2011, how much lower can it fall before the country should worry?

The good news for China is that forces driving down reserves for the past two years have recently been dissipating. The biggest force is the movement of the U.S. dollar. It has turned weaker in 2017, which has slowed the Chinese yuan’s fall in relation to the dollar and given China’s central bank a rest from spending its stockpiled U.S. dollar reserves to prop up the value of the yuan.

Capital outflows are also slowing down. In other words, less money is leaving as rich people transfer stockpiles of cash out of the country; Chinese companies buy foreign companies; or, simply, Chinese companies and people inside China exchange their yuan for greenbacks as insurance. There were $45 billion in capital outflows in January, according to Capital Economics, down from $61 billion in December, and more than $100 billion last January.

These two factors—a weaker dollar and slowing outflows—mean less foreign reserves are being spent. That may continue for several months. “The various capital flow management measures introduced by the authorities in recent months, including the latest ones announced just before the Chinese New Year, will likely mitigate outflows in the near term,” Goldman Sachs analysts in Hong Kong wrote yesterday.

These capital flow management measures are already working: one narrow definition of outflows—known as payments—fell to $900 million in December, according to data from China’s State Administration of Foreign Exchange, compared to an average monthly exodus of more than $25 billion in 2016.

If the same factors that caused huge foreign reserve drops before ramp up again—the dollar takes off under President Trump and China’s capital outflows rise to crisis mode—China likely has a big enough stockpile of foreign currency to weather a couple more storms. China Economics says the country will be fine until the figure falls to $1.8 trillion; other economists cite an IMF formula predicting a similar minimum threshold.

Three trillion, it turns out, is still a lot of cash for China to play with.