China’s FX Reserves declined by US$ 34 billion in October, bringing this year’s cumulative loss to US$ 87 billion. There are at least two reasons to take this development in stride:
In our view, investor concerns about China are premature. Granted, China has implemented the types of expansionary policies that have often proven disastrous for emerging markets. Chinese domestic credit grew rapidly in response to the global financial crisis as Chinese authorities implemented countercyclical policies. And the Chinese central bank has implemented further countercyclical policy moves this year by decreasing short-term interest rates by roughly 1.5%. These developments warrant further monitoring. However, we think that the Chinese authorities are still well in control of the situation.