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When $4 trillion is Too Much and $3 trillion is not Enough

marctomarket.com / by Marc Chandler / January 11, 2017

News that China’s reserves approached $3 trillion at the end of the last year has spurred expressions of concern. Its reserves have fallen by roughly $1 trillion since peaking mid-2014. The irony that is lost on many investors is two years ago pundits were arguing that China had too many reserves and now some are claiming that their reserves are insufficient.

Insufficient for what? By most measures, they are more than adequate. The reserves are sufficient to cover imports for 18 months. The reserves are three times more than the short-term foreign debt obligations. China’s reserves are insufficient if the current pace of drawdown continues.

The value of China’s reserves fell by $832 bln in 2015-2016. At the current pace of reserve loss, in three and half years, China will not have any reserves. Of course, this is not going to happen. The IMF argues China’s reserves are “adequate” provide capital controls remain. Those capital controls not only remain, but they have been expanded.

Some observers argue that the decline in China’s reserves is equivalent to the amount of Treasuries it is selling. This is simply not true. China does appear to be reducing its Treasury holdings, but now where near the scale that has been suggested. According to the US Treasury data, China’s holdings of US Treasuries peaking in late 2013 near $1.32 trillion. As of the end of October, which is the most recent data available, US Treasury estimates China’s holdings of US government debt stands at about $1.12 trillion.

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