Why We Still Need to Worry About China’s FX Reserves

China’s pile of foreign exchange reserves has long been touted as a bullish signal for the country’s ability to weather economic storms. But China is now in a policy trap as it expands the domestic money supply in order to funnel liquidity into the banking system to roll over its bad debts.

Data released in July throws into sharp relief the cost of Beijing’s approach: a depleting war chest of foreign exchange reserves relative to its expanding domestic money supply, which could prove insufficient in the looming battle against capital outflows.

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