China Reserves vs M2 Worse Than 1997 Asian Crisis

Balding: End of Week Thoughts on a Big Week

With $3.6 trillion in reserves, China will have no problem defending the RMB and imposing its preferred value on the market.

Yes and no but more no than people think. One of the most common mistakes people make looking at Chinese data is distinguishing between absolute and relative data. $3.6 trillion is a large amount of reserves in absolute terms but much smaller in relative terms. According to my calculations, reserves relative to nominal GDP for 1997-8 Asian tigers is 23% compared to China’s current 34.7%. However, if you compare reserves to M2 money supply the picture is much different. By that measure, China only has reserves equal to 17% of M2 versus 28% in 1997-8 Asian tigers. Given the large demand to move assets out of China, primarily by Chinese firms and individuals it should be noted, the $3.6 trillion in reserve assets looks much smaller against the enormity of its wealth and asset base. If Chinese investors and individuals start to feel significant concern about the RMB, the demand for foreign assets could turn into a flood rapidly if the PBOC fails to arrest the decline. $3.6 trillion is a large number but in the world second largest economy with 1.3 billion, that should be thought of as a small $3.6 trillion.

Here's a chart of Asian currency reserves to M2 back in the late 1990s:

Here's the chart for China. For 2011, see Home buyers in Shanghai angry at massive price drops, smash offices and Yuan hits limit low for fifth straight day. For the 2008 drop in the yuan, see ZH: Intraday USDCNY Unchanged Since 2006. The PBOC successfully averted depreciation pressure in 2008 and 2011/2012. The chart below shows it may be impossible now.

This is a chart of China's M2 divided by reserves, showing how many yuan of M2 exist for each dollar of reserves.