China foreign exchange reserves fell by another $100 billion in January. As the China’s economy is slowing down, the flight of investors seeking more profitable markets puts pressure on Yuan. The Chinese government, determined to support the value of the currency, is forced to buy Yuan in large quantities. Large scale buying is complemented with other measures, such as putting a limit on the amount of cash the Chinese citizens can withdraw overseas at 100,000 yuan ($17,737) per year.
The reserves that once reached $4 trillion, now dwindled by almost $800 billion to about $3.2 trillion. What remained is still a sizable amount of currency. But since there is no signs for improvement of the Chinese economy, the Yuan will experience the exceeding downward pressure. If the Chinese government does holds on to the idea of support the yuan at its current level, more and more reserves will have to be spent, probably at the increasing rate. If the spending continues, China will be out of reserves in three years.
Historically, large scale currency manipulation never worked in the long term. If a currency is bound to depreciate due to fundamental factors, the reserves spent on maintaining the currency may, at best, slow down the fall. After all the measures are tried and failed, the currency depreciates, sometimes in disorderly manner, and the country is left with low or no reserves. And the money spent on currency support always ends up at the accounts of traders betting against the currency.