China’s State Administration of Foreign Exchange released preliminary data for China’s Q4 2015 balance of payments last week, showing a quarterly current account surplus of $84 billion and a financial account deficit of $200 billion, including a $115 billion drop in foreign exchange reserves. PBOC followed over the weekend by announcing a $99.5 billion decline in foreign exchange reserves in January, raising new questions about the short-term sustainability of China’s defense of the exchange rate. Changing market expectations of exchange rate movement over the past year have produced critical shifts in behavior from banks, corporates, and speculators. The question of what channels are responsible for most of the capital outflows from China remains critical for projections of how long the PBOC can continue to defend the currency.
