As China’s economic growth has slowed, some bullish investors have pointed to China’s “deep pockets” as a way for the country to keep its economy growing. Yet, data published on Friday showed that China’s supposedly deep pockets could soon run dry.
During the final three months of the year, Chinese reserves dropped by 0.6%. Although this is but a tiny drop in the bucket for China, it could indicate the start of a disturbing trend for the world’s fastest growing economy.
As China’s trade surplus falls, and investment funds begin to pull out of the country, it may be no surprise that China’s foreign exchange reserves are falling. The country has managed to accumulate a large surplus by running a trade deficit for years.
This has been a policy employed by many East Asian economies, like South Korea and Taiwan, who have worked diligently to maintain large trade surpluses and foreign exchange reserve stockpiles.
This may have been motivated by the fallout from the 1997 Asian financial crisis, as the countries moved to build up their foreign exchange reserves in an effort to prevent a second financial crisis. In the wake of the 2008 financial crisis, China was able to finance a large expansion of its economy. It rolled out a $2 trillion stimulus program based on large-scale construction projects, which allowed China’s economy to continue to grow and create jobs for the millions of peasant laborers.
