China News recently reported that, based on data released by the Chinese central bank, the Chinese foreign exchange reserve has been shrinking rapidly for two months now. In July alone, the total declined by RMB 24.5 billion (around US$4 billion). This could be one of the key causes of tight market liquidity. Experts expressed the belief that the foreign exchange balance decline could be the result of two forces: (1) the US Federal Reserve clearly intends to exit its QE (Quantitative Easing) strategy; (2) the Chinese State Administration of Foreign Exchange is requiring banks to increase their foreign exchange reserve. It is widely expected that international “hot money” will be leaving emerging markets and this trend will continue to impact the Chinese market where the expectation of depreciation in the Chinese currency is high.
Source: China News, August 21, 2013