A giant that shrinks when coming closer -- that's what Victor Shih sees when looking at China's three trillion dollars of foreign exchange reserves. Shih is Assistant Professor of Political Science at Northwestern University, and he tells us how China could run out of reserves pretty quickly in the event of a crisis.
Shih has collected data on banks and wealthy households in China, and he warns that the wealthiest 1% of households hold enough deposits in the banking system that if they start moving money out of the country, $3T could start to seem like a much smaller number.
Capital flight on the order of half a trillion -- that's no problem for China's banking system, Shih says, because China has the world's highest required reserve ratios, acting as cushion. But at around the $1T mark, the central bank would be forced into large-scale asset sales to avoid illiquid banks.
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