By Gordon G. Chang at The National Interest
Burn rates never stay the same in a crisis. Beijing will undoubtedly have to spend at a substantially faster pace to support the renminbi if market participants lose even more confidence in coming weeks and months. Moreover, the Chinese central bank will have to spend big if the Federal Reserve raises U.S. interest rates next month, as it still might, and Beijing has no choice but to sell dollars to handle unprecedented capital outflow, which could be running at the rate of $70 billion a month.
Considering everything, it is unlikely that China’s forex reserves will last as long as a year, as the Financial Times estimated, even if they are as large and liquid as the State Administration of Foreign Exchange, the central bank’s custodian of the reserves, has claimed.
Beijing will not allow the reserves to plunge to zero, so look for Chinese officials to adopt emergency measures of some kind. Vice Finance Minister Zhu Guangyao, in stark comments to CNN released on Saturday, said “we must take action” if there is “systemic risk to the financial system.”
And what sort of action might that be? Franklin Roosevelt shut the banks in March 1933 and Hong Kong officials closed their stock market in October 1987, so Chinese President Xi Jinping may just stop stock and currency trading altogether. That may sound inconceivable now, but the fact that Vice Minister Zhu would talk about systemic risk to a foreign media outlet shows just how serious the situation really is.
In this situation, bland reassurances from Premier Li Keqiang, like the one the State Council released within hours of Zhu’s comments hitting the wires, show disarray in Beijing policy circles. China’s fundamental problem is not messaging, but inconsistent messaging can only make matters worse. As long-time China bull, Arthur Kroeber of Gavekal Dragonomics, told the Financial Times last week, “Markets trade as much on policy signals as on economic reality, and there has clearly been a breakdown of communication between Beijing and the rest of the world.”
Beijing’s leaders, in short, have lost the confidence of market participants, both inside and outside China. Nothing good ever happens when that occurs.
And nothing good is happening now. Before the August 11 devaluation and the announcement of market reforms, China had what a Beijing insider “with ties to the PBOC” called “a credible peg to the U.S. dollar.” The central bank did not need to intervene much, but now, after one inexplicable misstep after another, it has no choice.
Yet even before the latest series of crises, China’s foreign exchange reserves were falling. The State Administration of Foreign Exchange has reported that reserves declined $299.4 billion in the last four calendar quarters.
Despite the plunge, most analysts see no continuing crisis. Yet the rate of Beijing’s dollar-selling tells us the Chinese leadership has few options left and all of them are horrible.