US Treasury data combined with PBoC reporting suggests that China’s foreign currency reserves experienced a strong decline in November. There are several explanations and some see bitcoin to be the beneficiary.
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Last week, the Peoples’ Bank of China reported $3.4tril forex reserves, its lowest level since 2013, and with November capital outflows amounting to some of the largest ever.
Domestic and foreign investors have been trying to get currency out of the country. Some Chinese see better investment opportunities outside of the country, whether in the US or European property markets, or in foreign stocks and bonds.
Julian Evans-Pritchard, chief China economist for research firm Capital Economics told CCN:
Today’s data suggest that capital outflows picked up sharply [in November]
Market commentators have various explanations for the capital outflows being experienced by China.
One explanation is that outflows accelerated when Chinese authorities devalued the yuan three times since August. The surprise devaluations were both unannounced and inconsistent, as the Chinese government declared, after the first devaluation move, that they wouldn’t repeat the measure.
The series of devaluations were accompanied by a sell-off in Chinese stocks as the market bubble popped. Additionally, concerns about a manufacturing slow-down and a general cooling of China’s economy spurred foreign investors to take profit on investments.
Regardless of central bank devaluation of the yuan, capital outflows (such as when investors withdraw their money from Chinese banks) means that yuans are being converted to euros, dollars, and other currencies. The effect of selling yuan and buying other currencies, is that the yuan’s exchange rate deteriorates further.
The Peoples Bank of China can counterbalance the effect of yuan outflows by using its own foreign exchange reserves to, in turn, buy yuan. Most central banks use this strategy on a daily basis to stabilize their national currency’s exchange rate, but there is, of course, a limit to any particular central bank’s reserves.
Another explanation for the drop in China’s currency reserves is that forex reserves are typically reported in US dollars. Since the US dollar appreciated against most international currencies during November, any euros, yen or Swiss franc held by China would look less valuable.
Says Marc Chandler, head of currency strategy at Brown Brothers Harriman:
It seems reasonable to assume that nearly half of the decline in China’s reserves may be traced to the vagaries of the foreign exchange market.
Whatever the explanation, more than $500bil has left China during 2015 – a significant amount even for the world’s second largest economy.
China limits currency expatriation to $50,000 per individual per year. However, during the past few months Beijing has even imposed limits on the cash amounts Chinese citizens can withdraw from overseas ATMs.
Many bitcoin market participants allege that the increasing capital controls being imposed on Chinese citizens has turned their attention to bitcoin as a means of capital flight, and, hence, the strong buying witnessed in Chinese bitcoin exchanges during October and November.
Perhaps so, but for this argument to hold water, one would expect bitcoin selling to then be stronger in the USD based exchanges, and for bitcoins not to be sold with great volume in the CNY exchanges where they were bought.
Investing.com reports that US Crude futures plunged below $36 a barrel for the first time in more than seven years, after an International Energy Agency forecast that global energy markets will remain oversupplied for the foreseeable future.
Best to tread lightly in the market (or better still, stay out) during the coming days as the Fed Rates Announcement approaches on Wednesday December 16 at 19h00 UTC.
This analysis is provided by xbt.social.
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The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.
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