Kit Juckes, Research Analyst at Societe Generale, notes that the China’s FX reserves fell by $99.5bn to $3.23trn in January.

Key Quotes

“The fall was marginally smaller than consensus forecasts were looking for and, in of itself, doesn’t really take the debate about the sustainability of China’s current FX policy any further. The bigger question is how much the pace of capital outflows and FX reserve reduction slows in the coming months after the break for the Chinese New Year celebrations.

The IMF’s calculation of ‘adequate’ reserves suggests that there is less room than the $3.2trn total implies but my impression is that there is virtually no reserve armoury big enough to cope with widespread capital outflows, if capital is allowed to flow relatively freely. Which is just to say that even if the market does calm down over the festive period, this is a story which will return.

The fall in Chinese FX reserves will make more headlines than market moves, but they are a reminder of the challenges facing the world’s second biggest economy, even as everyone celebrates the Year of the Monkey. Maybe the Chinese New Year will dampen volatility and allow risk assets to claw back some ground?”