China’s foreign exchange reserves dropped to $2.99 trillion in January, falling below the $3 trillion level for the first time since early 2011.
Reserves of $3 trillion were claimed to be the psychological bottom line for investor confidence by some people, who thought dipping below that would cause investors to panic.
However, there is no need to worry, given that China’s increasingly diversified foreign exchange basket at a time of a weak dollar has helped maintain its foreign exchange stability and there is no possibility of large-scale capital flight.
The central bank cites the supply of foreign exchange funds as one of the main reasons for the recent decline in the country’s foreign reserves. This gets to the point, as there is usually an increased demand for foreign currencies during Spring Festival because many people visit overseas destinations during the holiday, which began in late January this year.
Data from travel number cruncher ForwardKeys indicates that the number of Chinese who made overseas trips in January grew by 9.8 percent year-on-year. Stricter requirements on purchasing the $50,000 annual foreign exchange quota released in January may have also prompted some to go ahead with the purchase.
That the country’s foreign reserves are below $3 trillion should not be a source of worry. A decline of $12.3 billion is not big, and the targeted responses the central bank has made to the yuan’s exchange rate fluctuations indicate that it has sufficient means to deal with short-sellers of the yuan.
Any fluctuations of a country’s foreign exchange reserve within a certain range are normal, and China’s current reserves, although below $3 trillion, are still the world’s largest. In a complex and changeable economic and financial environment at home and abroad, one should not artificially set a “psychological limit” for China’s foreign exchange reserves.