Appreciation cuts into forex reserves

China's foreign exchange reserves dwindled by approximately $100 billion between the second and the third quarter, according to statistics released by the State Administration of Foreign Exchange (SAFE) late last month. This marks the first such contraction in China's forex reserves in two years.

SAFE officials pinned the decline on an appreciating greenback. Indeed, the US dollar index rose by 7.7 percent over the three-month period through the end of September. Naturally, this means assets denominated in other currencies would decline in value when translated into US dollar terms.

At the same time, it cannot be denied that foreign capital is retreating from China thanks to recent indications of a deepening cool-down in the economy. All things being equal, China should have had 1.22 trillion yuan ($198.86 billion) in funds outstanding for foreign exchange between June and September if one factored in the country's $159.73 billion trade surplus with the $38.44 billion in foreign direct investment it received during the same period.

Still, the negative impact of hot money outflows on China should not be exaggerated. After all, the country's foreign exchange reserves are still large enough to help it cope with the withdrawals.