For the first time in more than 10 years, China's foreign exchange reserves declined quarter-to-quarter, from the third to the fourth in 2011. This decrease is not due to valuation issues (for example, a reduction in the market value of financial instruments in in which they are invested), given that reserves are valued, in the case of securities, at cost or at face value. This is a 'true' reduction, which expresses changes in the inflows/outflows of current account or capital movements.
Certainly, the Chinese trade balance continues to be in surplus (unlike the Japanese one which experienced the minus sign of the deficit in 2011 for the first time in many years), but this surplus has decreased. However, a decline in a surplus does not explain the decline in reserves. A net capital outflow is also needed, large enough to more than compensate for the small current account surplus. In a context of capital movement restrictions, this outflow is unlikely to be due to foreign investment by the Chinese, whose savings continue to be fenced off inside the country. Instead, they are probably sales of Chinese assets held by foreigners, who need to repatriate funds given the prudence of Western banks in granting loans.
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