Table 5: Scenario analysis of China’s 2017 FX reserves (yellow denotes lower reserves/ blue higher) Trade balance, USDbn 100 150 200 250 300 350 400 450 500 300-2885 = 2.935 2.985 = 3.035 3.085 = 3135 mae oo | 350 2,835 2,885 2,935 2,985 3,035 3,085 3,135 400 2,185 2,835 2,885 2,935 2,985 3,035 3,085 3,135 r= 450 2,135 2,185 2,835 2,885 2,935 2,985 3,035 3,085 3,135 2 500 2,685 2,135 2,185 2,835 2,885 2,935 2,985 3,035 3,085 = 550 2,635 2,685 2,135 2,185 2,835 2,885 2,935 2,985 3,035 = 600 92585 2635 268 2735 2785 2835 2885 2935 2,985 3 650 ©2535 2585 2,635 6) 785 2,835 2885 2,935 £ 700 2,485 «= 2.535 2.585 «(2 CM You PN 735 852.8352. 885 800 2385 «2435 2485 2535 2585 2635 268 785 850 | 2335 2385 2435 248 2535 2585 2635 2685 2,735 900 2,285 2335 2385 2435 2485 2535 2585 2635 2,685 Source: BofA Merrill Lynch Global Research, Bloomberg. 2016 rate is annualized from the first 3 quarters of data. Table 5, above, shows a scenario analysis of China’s FX reserves in 2017 under different trade balance and capital outflows. The analysis makes two assumptions. The first assumption is all the changes in the Balance of Payment’s (BoP) reserve assets are reflected in the headline FX reserves figure. The second assumption is that the income balance is USD -36bn, which was derived from the annual rate since 2015. We believe a decline of FX reserves to USD 2,600bn to USD 2,900bn would only be a problem for China if it attempted to implement a “fixed exchange rate” without capital controls. Such an FX regime requires heavy FX intervention and would put downward pressure on its FX reserves, making this FX regime choice no longer tenable for China. The IMF’s framework for calculating adequate FX reserves is based on whether there are capital controls and whether the currency operates on a fixed or floating exchange rate regime (Table 6). The latest readings show a fixed exchange rate regime without capital controls in China would require USD 2,911bn of FX reserves, which probably won'