BEIJING China still owns the world's largest currency reserves, but it has been burning through them at such a pace that some think Beijing might soon have to allow a sharp fall in the yuan or back-pedal on liberalisation and tighten its capital controls.
Foreign exchange reserves in China declined $99.5 billion in January to $3.23 trillion, following a record fall the previous month, and have shrunk by $762 billion since mid-2014, more than the gross domestic product of Switzerland.
That still leaves a mighty arsenal, and the People's Bank of China (PBOC) says it is more than adequate, though it has not said what the minimum might be and did not return a request for comment.
PBOC governor Zhou Xiaochuan told Caixin magazine a week ago that much of the outflow had been Chinese companies repaying dollar debt as the greenback rose, which would bottom out, or outbound investment, which was to be welcomed.
Most economists agree China has a way to go before running out of road, but some believe it will have to hit the brakes in months, not years.
The pace of decline has accelerated as the PBOC fought to keep the yuan steady in the face of speculative selling offshore and capital flight at home, a task made harder by China's slowest economic growth in 25 years and the bank's own decision to guide the currency down in August and again in early January.
Though it has huge reserves, an economy the size of China's needs them to cover imports and foreign debts, and the less liquid assets in reserves can't readily serve those purposes.
Though the composition of China's reserves is a state secret, officials also say the falling dollar value of other currencies it holds accounts for some of the fall.
Economists and foreign exchange professionals around the world are nevertheless asking how low can they go before Beijing is forced to choose between fresh capital controls or giving up selling dollars to defend the yuan, also known as the renminbi.
French bank Societe Generale says International Monetary Fund guidelines put $2.8 trillion as the minimum prudent level for China, which is not far away if reserves keep falling at the current pace.
"If that occurs in the next few months," says SocGen, "expect to see a tidal wave of speculative selling, forcing the PBOC to throw in the towel and let the market decide the level of the renminbi exchange rate."
A G20 deputy central banker was considerably more sanguine.
"Whatever number I would come up with, it would be a lot less than $2.8 trillion," he said, adding that reserves could fall another trillion by year-end in conjunction with stability in the exchange rate.
NO MAGIC NUMBER
Analysts at HSBC felt $2 trillion would be sufficient in theory, but doubted Beijing would risk letting ever-falling reserves spook local investors into shifting more funds offshore.
According to Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman, New York, China has 17 months' import cover, and its short-term foreign debt is only 25 percent of reserves, comfortably better than the three-month and 55 percent levels that might be considered safe for emerging markets (EM).
"I would say by any metric that we use for EM, Chinese reserves are more than sufficient," he said.
Within China, economists agree there is no imminent crisis facing policymakers.
"We have $3.3 trillion. What should we worry about?" said one economist at a Beijing-based think-tank. "We have net claims on foreign assets of $1.5 trillion, and we still have a trade surplus of about $600 billion."
If it falls to $2 trillion by 2025, he said, "we will still be safe and sound".
Another economist at a government think-tank put the bottom line at $1.62 trillion.
"They are a bit worried about the fall in reserves, but it's too early to panic," he said, though he acknowledged an unresolved conflict between overseas investors expecting the yuan to fall and the government's belief that China's fundamentals did not support continued depreciation.
Ultimately, the safe level is less about ratios than sentiment, said Thin at Brown Brothers Harriman.
"There’s no magic number ... I do think that confidence is a big part of this whole thing, and China’s policymakers are really trying to restore confidence."
Certainly bearish bets against the yuan have fallen since spiking in January, according to a Reuters Asia FX positioning poll, as the dollar has come off its peaks.
But Chris Morrison, portfolio manager at Hedge fund Omni, which has been vocally betting against the currency, thinks the tipping point is closer than most.
"This game is all to do with expectations and confidence... Once the market sees the bottom of the pit, they lose all credibility. And I think going through $3 trillion is that point."
(Reporting by Kevin Yao; Additional reporting by Patrick Graham and Dion Rabouin; Editing by Will Waterman)
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