The RMB and capital outflows

CHINA FINANCIAL - Report 22 Feb 2016 by Michael Pettis

- Beijing’s FX reserves are substantial, and recent concerns that they will very soon be depleted are overstated, although there is no question that if net outflows continue at current levels for many more months, we will have to start seriously reconsidering.
- The idea, however, that China needs $2.7 trillion of reserves to perform the basic insurance functions of FX reserves is almost certainly not true. The appropriate amount of reserves China needs to guarantee necessary imports and the payment of obligations on the capital account is probably half that level.
- Beijing is clearly very concerned about outflows, and for now the PBoC’s strategy is likely to be driven by efforts to reduce these outflows. There are a limited number of strategies, however, and it is not clear to me that any of them are likely to cause outflows to abate.

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