China’s reserves dip below $3 trillion – should we be worried?

Much of the money has been diverted into offshore investment by Chinese companies, including many state enterprises. 
Chinese companies invested a record $145 billion abroad in 2015, 18.3 per cent more than in 2014, and it overtook Japan to become the world's second-biggest cross-border investor after the US. This trend accelerated last year with Chinese companies investing heavily in a wide range of international assets including infrastructure, energy, property, British football clubs and Hollywood film studios. While much of the outbound investment has been going to Europe and the US, we are also seeing an impact in Southeast Asia, where Chinese investment has increased dramatically.
Moreover, it is debatable whether it is healthy for China to have such high levels of reserves. They rose continuously for over a decade, as the yuan was loosely pegged to the dollar and reserves were accumulated as part of the management of the currency. 
When the yuan was the subject of speculation, forcing it upwards, reserves increased. However, this trend reversed in 2014 when the currency began to face downward pressure and reserves were sold to support it. 
Hopefully, we might see an end to these extreme swings as China moves towards increased convertibility of the yuan. As the currency becomes more open to market forces, we should be able to avoid a repeat of past situations such as a sustained increase or drop in reserves.
However, the current situation is quite a complex one as China has introduced more market freedom at a time when there is uncertainty about the strength of the Chinese economy and the US dollar has been rising strongly. 
This has led to some anxiety among investors and there have been strong outflows of capital. This put pressure on the yuan, which depreciated more than 6 percent against the dollar last year. 
To curb this situation, in January the Chinese government introduced stricter requirements for converting the yuan into foreign currency. The central bank also signalled a tightening stance by raising some lending rates. 
So far the response has been fairly mild but if there are additional capital restrictions, or a move to further depreciate the yuan, this will have a ripple effect here. Thai policymakers and businesses will need to closely watch developments.

Hopefully we might see an end to these extreme swings as China moves towards increased convertibility of the yuan. As the currency becomes more open to market forces, we should be able to avoid a repeat of past situations such as a sustained increase or drop in reserves.