China’s foreign currency reserves (excluding gold) ended August, 2017 at almost US$3.1 trillion, down $18 billion, or 0.62%, from a year ago. Over the last five years, China’s foreign exchange reserves have decreased at an annualize rate of 0.72%, so the rate of decline in August was slower than that in previous years. However, since the end of 2016, China’s foreign exchange reserves have increased US$61.5 billion. More than half of China’s gains in foreign exchange reserves came from limiting out-bound direct investment (ODI).

The Chinese authorities have sought to restrict overseas investment projects by Chinese firms. In August, the State Council announced it would limit investment in property, hotels, entertainment, sports clubs, and film industries.

In the first eight months of 2017, China’s out-bound direct investment declined 41.8% compared to the same period in the prior year, to US$68.7 billion. Over the same period, China’s foreign direct investment declined only 0.2%. Had out-bound direct investment maintained the prior year’s level, an additional US$49.3 billion would have left the country.

The change in foreign exchange reserves has mirrored trends in the value of the renminbi against the U.S. dollar. Over the last five years, the U.S. dollar has appreciated against the renminbi at an annualized rate of 0.9%. Over the last 12 months, the U.S. dollar has appreciated 3.1% against the renminbi. However, that trend has reversed since the end of 2016, with the U.S. dollar depreciating 3.7% against the renminbi.

Nothing has changed structurally to reverse the outward flow of China's excess liquidity. If the policy towards outbound direct investment changes soon, we can expect the renminbi’s depreciation against the U.S. dollar to resume. If the policy towards outbound direct investment does not change soon, we can expect excess liquidity in China to find other ways out of the country, such as through the current account.