China:FX reserves rose slightly in February,back to just over US$3tn

Bottom line:The PBOC’s FX reserves increased by US$7bn in Feb to US$3.005tn (BBGconsensus: -US$29bn; Jan: -US$12bn), the first increase since Jun ’16. Afteradjusting for currency valuation effects, we estimate that reported reserves rose byabout US$19bn. But, as usual, subsequently released data on the PBOC’s FXposition and SAFE flow data are important when gauging the underlying FX flowsituation.

Main points:The PBOC’s FX reserves unexpectedly increased in Feb, by US$7bn, to just aboveUS$3tn again. We estimate currency valuation effects at about -US$13bn (assumingthe currency composition of China’s reserves is similar to that of the global average).

Excluding such effects, reported FX reserves would possibly have increased byUS$19bn (vs. -US$37bn in Jan). However, estimates of overall valuation effects canbe noisy—indeed, SAFE indicated that the market value of the reserve portfolioincreased in Feb, which counteracted the negative currency valuation effect. Thatsaid, it is unclear exactly how large these effects were in Feb (and it has not alwaysbeen obvious how the portfolio valuation effects are recorded).

Therefore, another dataset, the “PBOC’s FX position” (usually released in the middleof the month), should give us a much better sense of the PBOC’s FX sales net ofvaluation effects, as this dataset shows the PBOC’s FX assets recorded at bookvalue. On several occasions in the past year this dataset has suggested ameaningfully different amount of FX sales by the PBOC than implied by the reservedata.

For reference, in January the PBOC’s FX position dataset showed a decline ofUS$30bn, even after a strong trade surplus of US$33bn (including merchandise andservice trade). The trade surplus was likely not nearly as strong in Feb due toChinese new year seasonality—in other words, the capital account dynamics wouldhave needed to undergo a significant reversal for the PBOC to accumulate (ratherthan de-accumulate) FX assets in Feb.

In general, reserve data provide only partial information on the FX flow situation, andwe will await further SAFE and PBOC data to assess the underlying trend. In termsof the macro backdrop, the relatively subdued USD, which helped to stabilizeUSD/CNY even as the CNY continued to weaken moderately against the CFETS