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China’s Cash Crunch August 20, 2012

Posted by tkcollier in Economy & Business, Geopolitics.
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At first glance, that proposition seems preposterous. After all, the People’s Bank of China, the central bank, held $3.24 trillion of foreign currency reserves at the end of the first half of this year. Yet foreign currency, no matter how plentiful, has limited usefulness in a local currency crisis. In any event, the PBOC’s foreign currency holdings are almost evenly matched with renminbi-denominated liabilities that were incurred to acquire all those dollars, pounds, euros, and yen. As a result, the central bank cannot use the reserves without driving itself deep—actually, deeper—into insolvency.

When shops close to avoid predatory officials, we know China’s coffers are almost empty.  And to make matters worse, the country’s financial problems will be harder to solve now that the country’s balance of payments has turned negative.  The net outflow in the second quarter of this year was the first since 1998.  The country’s reserves also dropped in Q2.  We should not be surprised: there was perhaps $110 billion of capital flight during that period, and the gusher outflow looks like it continued in June.  Chinese citizens are losing confidence fast.

No developing country has ever escaped a major financial crisis.  The People’s Republic of China is about to have its first one now

via China Is Running Out Of Money – Forbes.

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