China:FX reserves fell $12bn in January to US$2.998tn

The PBOC’s FX reserves fell by US$12bn in January to just below $3tn. We estimatecurrency valuation effects at about +US$25bn (assuming the currency compositionof China’s FX reserves is similar to that of the global average). Therefore, excludingsuch effects, FX reserves would possibly have decreased by US$37bn (vs. -$35bn inDecember). However, we await another dataset called “PBOC’s FX position” (whichis usually released in the middle of the month) to cross-check estimates on PBOC’sFX sales net of valuation effects (see here for why).

Reserve data provide only partial information on the underlying FX flow situation, soit is still too early to conclude whether outflow pressure moderated in January. Butthe notable (1%) CNY appreciation against the USD in January on the back of broadUSD weakness probably helped improve CNY sentiment (even though CNYweakened against the CFETS basket by 0.6%). Moreover, the various capital flowmanagement measures introduced by the authorities in recent months, including thelatest ones announced just before the Chinese New Year (see here), will likelymitigate outflows in the near term. A re-strengthening in USD (as expected by ourglobal FX team), however, could increase outflow pressure in the coming months.