China’s government officials have reported that the level of foreign reserves has been falling in China as noted by news agencies such as Bloomberg http://www.businessweek.com/news/2011-12-07/china-s-foreign-reserves-continue-to-fall-ex-pboc-adviser-says.html. There could be a number of reasons for why this is happening. First and foremost, it signals that flows of speculators’ capital have been coming out of China rather than going into China. Most likely, the worries about the crisis in Europe causing another global recession have caused another flight to “safety” which historically has meant that speculators pull money out of emerging markets quickly and park their money in Treasuries. Another reason for the capital flight could be that speculators fear the implosion of China’s real estate bubble that China bears such as Jim Chanos have been talking up the last two years http://www.charlierose.com/view/interview/10960. While no one quite knows what the total real estate liabilities are in China’s banking system, speculators would rather act first and ask questions later which has been a common reaction for any news item. Finally, the drop in reserves could also reflect the slowing exports to developed countries as Europe and the U.S. battle the sluggishness in their economies and China’s active steps to rebalance their economy to one based on domestic consumption.
