China’s forex reserve is the amount of foreign currency held by the country’s central bank, the People’s Bank of China (PBOC). It is used to maintain the stability of the country’s currency, the yuan, and to fund its international trade and investment activities. However, in recent years, China’s forex reserve has been steadily declining, raising concerns about the country’s economic health and its ability to manage its currency.
In 2014, China’s forex reserve reached a peak of $4 trillion, making it the largest in the world. However, since then, it has been steadily declining, and as of April 2021, it stood at $3.2 trillion. There are several reasons for this decline, including:
1. Capital outflows: One of the main reasons for China’s declining forex reserve is capital outflows. As China’s economy has slowed down and its stock market has become more volatile, many wealthy Chinese citizens and companies have been looking to move their money out of the country. This has led to a significant outflow of capital, which has put pressure on China’s forex reserve.
2. Currency manipulation: China has been accused of manipulating its currency, the yuan, to keep it artificially low in order to make its exports cheaper and more competitive. This has led to a significant inflow of foreign currency into China, which has boosted its forex reserve. However, in recent years, China has been trying to shift away from this policy and allow the yuan to float more freely. This has led to a decline in the inflow of foreign currency, which has put pressure on China’s forex reserve.
3. Trade tensions with the US: The ongoing trade tensions between China and the US have also had an impact on China’s forex reserve. The US has imposed tariffs on a range of Chinese goods, which has led to a decline in China’s exports to the US. This has, in turn, led to a decline in the inflow of foreign currency into China, which has put pressure on its forex reserve.
4. COVID-19 pandemic: The COVID-19 pandemic has had a significant impact on China’s economy and its forex reserve. The pandemic has disrupted global trade and investment, which has led to a decline in China’s exports and foreign investment. This has, in turn, led to a decline in the inflow of foreign currency into China, which has put pressure on its forex reserve.
Despite these challenges, China’s forex reserve remains large compared to other countries. However, the declining trend is a cause for concern, as it could potentially lead to a currency crisis if the reserve falls too low. To address this issue, China has been implementing various measures to stabilize its forex reserve, including:
1. Capital controls: China has tightened its capital controls to prevent excessive outflows of capital. It has imposed restrictions on the amount of money that individuals and companies can transfer out of the country, and has also tightened restrictions on foreign investment.
2. Promoting the yuan: China has been promoting the yuan as an international currency, in order to reduce its reliance on the US dollar. It has been encouraging other countries to use the yuan in their international trade and investment activities, and has been expanding its network of currency swap agreements with other countries.
3. Increasing foreign investment: China has been encouraging more foreign investment into the country, in order to increase the inflow of foreign currency. It has been opening up more sectors of its economy to foreign investment, and has been implementing various measures to make it easier for foreign companies to do business in China.
In conclusion, China’s forex reserve has been declining in recent years, due to a range of factors including capital outflows, currency manipulation, trade tensions with the US, and the COVID-19 pandemic. While the declining trend is a cause for concern, China has been implementing various measures to stabilize its forex reserve and ensure the stability of its currency.
