China’s New Forex Strategy

By | February 16, 2017

The PBOC’s New Forex Strategy

Tapping Foreign Loans to Reduce Capital Flight

Chances of Success are Slim

As China’s economy slows, the country’s economic leaders have been cycling through stimulative policies, finding creative ways to generate additional leverage in a system already over-leveraged. In 2015, the stock market was view as an easy source of capital, to be pushed up and then used as a giant piggyback for debt- ridden state firms to tap into through new equity issuances. That policy failed because there were inadequate resources to prop up the market and investors in the end did not believe the government would support the market.

In 2016, the unofficial macroeconomic policy was to utilize the consumer as a source of capital. Both PBOC and banking officials said in interviews that they believed that the consumer was “underleveraged” (their words) and should be utilized for additional loans. After all, they noted, consumer lending, although rising, remained below international norms. This strategy continuea as is apparent in the continued rise in the sale of private investments (Wealth Management Products.)

In February, the precipitous drop in China’s foreign exchange reserves below the psychologically important number of $3 trillion has spurred the PBOC and senior politicians to alter tactics. It appears that the new stratagem to avoid the actual process of deleveraging is to access foreign sources of capital.PBOC Forex Strategy