When $4 Trillion Is Too Much And $3 Trillion Is Not Enough

This is not to deny that there are private capital outflows from China. But the alarmist talk about the decline in reserves in unnecessary. When the yuan was appreciating, and capital was pouring into China, officials made it easier to export savings. Now that it is experiencing capital outflows, it is liberalizing inflows.  

Nor is this to deny that Chinese officials are in a tough position. If they step away from the intervention to support the yuan and let it fall, it would likely spur a speculative attack. This would show up in the offshore yuan (CNH), which may be one of the reasons officials engineered the short squeeze there last week. A sharp decline in the yuan would likely exacerbate the rising trade tensions as it would increase the opportunity for China to export its surplus output.  Also, a sharp devaluation would slow China's transition to a consumer-service economy.  

The paying back the dollar loans is not an infinite process, but rather, even if extended, a one-off factor. Slowing outbound direct investment may be assisted numerous host countries are becoming somewhat less receptive to direct investment from Chinese companies, many of which are at least partly state-owned.  

The situation is serious, but it is hardly an existential crisis for China. China's debt situation seems more pressing.All the capital outflows are not undesirable or unlimited.Moreover, capital controls can be adjusted. There may be no good options with the yuan. Slowing the decline can be costly. Allowing the full decline would be disruptive. Fortunately, unlike in the summer of 2015 or early 2016, global investors are not taking their cues from developments in China. 

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