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China economy

Dwindling reserves highlight need for real reforms

Ultimately capital controls to stem the outflow will not work unless fundamental issues are addressed

PUBLISHED : Monday, 13 February, 2017, 1:57am
UPDATED : Monday, 13 February, 2017, 1:59am

China’s foreign exchange reserves have fallen below US$3 trillion for the first time in six years. This is a psychological barrier. The breaching of it on its own is not rational grounds for concern. The remaining reserves amount to US$2.9982 trillion. The description of this sumDwindling reserves highlight need for real reforms by the State Administration of Foreign Exchange as “adequate” is an understatement. But the psychology will weigh with party leaders and economic advisers ahead of the 19th, five-yearly National People’s Congress later in the year at which future leadership succession will be decided.

A bigger than expected if slowing decline of reserves in January reflected continued capital outflow despite the imposition of strict controls late last year. We trust the authorities will resist the temptation to resort to short-term fixes. Ultimately capital controls will not work unless fundamental issues are addressed.

Should China worry about its falling foreign exchange reserves?

The outflow reflects economic conditions and in particular a lack of confidence in China’s economy. Investors around the world are watching to see how the policy response unfolds. Private business, which accounts for more than 60 per cent of GDP and 80 per cent of jobs, has been reluctant to invest because of poor returns and unclear prospects compounded by a threatened trade war with the United States. There has been a rush to move funds and park them in havens overseas.

The government needs to make it easier for the private sector to compete with the state sector and thus encourage it to invest, increasing domestic consumption. Officials know full well the solution lies in longer term measures rather than short-term fixes.

As China tries to seize leadership of free trade and investment from an inward turning US, the reality is that neither foreign nor local investors feel welcome in its huge market, thanks to government meddling, barriers to access and confusing red tape. If Beijing wants its bid for leadership taken seriously, it must mend its meddling ways and take the next step in reform and opening up that have lagged its global ambitions.