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According to the latest estimates, China faced massive outflows of money from its economy for a second consecutive year, despite a positive foreign direct investment and a large positive current account. In 2015, $744 billion moved out of the Chinese economy and the latest estimate suggests $728 billion moved out in 2016. China’s forex reserve peaked just below $4 trillion in June of 2014 and has been declining since. Since then, it has declined almost a trillion dollar and currently is at $3.01 trillion. With a decline in the forex reserve, Chinese yuan depreciated more than 11 percent since 2014, however, that has failed to provide a boost to the shrinking current account balance.
We, at FxWirePro, see more troubles ahead of China. Though the weakness of the dollar might be supportive of the yuan exchange rate in the first half of 2017, we see rapid depreciation or rise in the interest rates all across the curve or both in the second half of the year. As the Fed would increase their rates this year, the declining yield difference would add pressure on both domestic rates and currencies. A steady outflow of money and declining FX reserve would only worsen the conditions.
