china man prays praying year of the rooster

Things are looking a bit desperate in China.

The country has been suffering from money outflows for months  — something that troubles Beijing because it pulls down the value of the Chinese yuan and makes the economy harder to manage.

But government measure to stem the outflows — like requiring citizens to report transfers over $10,000 and discouraging overseas acquisitions— still aren’t showing up in the numbers. In January, up to $82.7 billion left the country, according to Bloomberg economist Tom Orlik, bringing currency reserves down below the $3 trillion mark.

Analysts are wondering how long the country can hold on without devaluing the currency, or taking control of it all together and undoing years of reforms to liberalize its markets.

“China’s authorities have chosen to pursue harsher measures against capital outflows over a large change in the exchange rate to address the country’s outflow problem, at least for now,” said Autonomous Research analyst Charlene Chu in a note to clients last month.

She continued: “This could work for a few quarters, but we think closing the gates is not feasible over the long run for the largest trading nation in the world with a USD33trn banking sector. We expect growth to begin decelerating in 2Q17, as a weaker credit impulse passes through, but this is of secondary importance to outflows and the currency.”

So things are getting real, but they’re also getting surreal.

The government is looking in every nook and cranny to block any way money can leave the country without its knowledge. That is why on Wednesday the People’s Bank of China had a meeting with the country’s top Bitcoin exchanges, to urge them to keep money in the country.

Let that sink in. The Chinese government went after Bitcoin.

The next day, two exchanges announced that they would no longer allow withdrawals and the cryptocurrency crashed almost 10%

And of course, state media is on message — telling people to remain calm because the situation is not that serious, while also blaming outside forces their trouble.

One state-owned finance publication said that there is “no need to worry,” because the overall fundamentals of the economy are good. It also blamed the issue of falling reserves on Tibet.

But right now reserves are important. China is using them to keep its currency, the yuan, stable as its value has been falling. The strong dollar is only been making that situation worse. 

And the reserves are important in the event of an emergency. The Chinese economy is transitioning from one based on manufacturing and exports, to one more based on services industries like retail and banking. That means a lot of massive, often state-owned companies are heavily indebted and need to be downsized. There’s a lot that could go wrong there that China could use reserves for.

Now, China could take control of the yuan and fix its value, but it’s clear from the media that the state wants to continue on its path to liberalization, not take steps back. It also wants to keep the currency stable. 

That, of course, means using more reserves to buy yuan and keep its value from falling too quickly. 

It’s true China does have plenty of reserves in the tank. But it’s also clear that the government is doing it’s to downplay the meaning of the continuing drop. Across the board, over and over, publications are referring to the drop in reserves below $3 trillion as a “psychological” issue.

Get your head around that too.

SEE ALSO: One of the most brilliant China minds in the world has a warning for the 2nd half of 2017

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