The descent of the yuan is a welcomed harbinger of requisite reform; the kind needed if Beijing is to deliver itself out of the ‘middle income trap’ that has ensnared so many other political economies. As of this writing, no one can tell how Beijing will fare going forward, but the fall of the value of the yuan tells of capital flight.
Each month, tens of millions of dollars leave the mainland, last month the total was $69 billion. For the past year the Chinese central bank has burned though about $1 trillion dollars of a $4 trillion dollar base reserve.
Why is Beijing worried? It’s Central Bank reserves are denominated in U.S. Treasury short term debt. As of now, it holds enough foreign cash to cover 20 months of imports with $3 trillion in holdings. Here’s where the boys in Beijing should be worried: the best measure of adequate reserve strength is a high ratio between M2 and currency reserves. As of now, it’s sufficient, but no one can see a bottom to the drive downward that is today’s yuan.