China:FX reserves fell US$69bn in November

The PBOC’s FX reserves fell US$69bn to US$3,052bn in November (Bloombergconsensus: -US$60bn; October: -US$46bn), the largest decline since January. Afteradjusting for currency valuation effects, we estimate that the reserves fall would beabout US$34bn. But as usual, SAFE data on cross-border RMB flow and onshore FXsettlement (out on Dec 16) should give important supplementary information on theunderlying flow situation.

The PBOC’s FX reserves fell by US$69bn in November. We estimate that currencyvaluation effects might amount to around -US$35bn (assuming the currencycomposition of China’s FX reserves is similar to that of the global average).

Therefore, excluding such effects (but before adjusting for portfolio valuation effectsdue to global bond price movements), FX reserves would have decreased byUS$34bn. SAFE mentioned that other factors such as global bond price movementsand FX lending related to “One Belt One Road” initiatives may also affect thereported reserve level.

A separate dataset, called “PBOC’s FX position” (usually released around the middleof the month), would give a useful cross-check on PBOC’s FX sales net of valuationeffects, in our view. This data shows the amount of PBOC’s FX assets at book value.

Partly reflecting the uncertainty of the size of valuation effects, there is sometimes asignificant gap between this data and the reserves data after adjusting for estimatedcurrency valuation effects (e.g., in the last few months since June, the formersuggests that the monthly average of PBOC’s FX sales was about US$25bn morethan implied by the latter).

Media reports over the past couple of weeks suggest that the authorities would betightening outflows through administrative means, including on outbound FDI (seee.g., here), gold imports (e.g., here) and cross-border net RMB payments (e.g., here;we discussed in our July report here the importance of this element in accountingfor China’s overall FX outflows). There has not been any concrete official confirmationor detail of the reported rules and implementation, so it is difficult to assess thepotential effectiveness. In general, a stronger capital control could help mitigateexcessive volatility in outflows driven by temporary sentiment factors. However,outflows may also reflect structural diversification demand—we have previouslyestimated that there could be a substantial amount of Chinese wealth to be allocated to foreign assets over time given that Chinese residents have been underdiversified(see our quantification in China: Where would the money go with a freeChinese capital account, EM Macro Daily, April 30, 2014). To the extent thatdiversification is an important driver, control measures could be effective indampening short-term outflows but may be less so in reducing the fundamentalpent-up pressure on the exchange rate.

Additional FX flow data points for November to come out in the next couple ofweeks are: