The value of China’s FX reserves stood at $3.438tn at the end of November (the Bloomberg median was $3.493tn, our forecast was $3.475tn), a decrease of $87bn from a month earlier. Our calculations suggest that exchange rate fluctuations will have reduced the dollar value of the portion of the reserves held in other currencies by around $30bn. This points to PBOC FX sales of $57bn last month. Since we expect the combined goods and services trade surplus to have been around $55bn last month, this would imply record net capital outflows of $113bn, up from outflows of $37bn in October.
Or, if you prefer charts like me,
In October, pundits thought the flows were abating because of more or less stable reserves, despite the fact that there were indications that the PBOC used currency swaps, as opposed to spot interventions, to meet outflow requirements. Now that the PBOC knows the market is watching the reserves, it has naturally decided to massage the reserve number. This is nothing new: central banks have resorted to deceit many times in history and in the recent past (see here for instance).
In order to get the full picture, therefore, it is necessary to deduct the swap notional from the official reserve number, which is complicated for China as the authorities might intervene not only via the PBOC but also via its “commercial” banks. Thus, I believe the “outflows” are likely much higher than what is generally assumed. However, it is virtually impossible to get the full picture and to “prove” one’s point – we will know the truth only when it does not matter anymore.
The only way to approach this problem is deductively. The reason for the outflows is and exchange rate is less economic activity in China, which in turn lowers the demand for renminbi (less transactions, less desire to hold it etc.). This, in turn, should lead to a lower exchange rate, ceteris paribus. Given that the FX rate is not allowed to adjust for political reasons, market participants have an incentive to exchange less wanted CNY for USD. Since the exchange rate as barely moved, but the slowdown in the Chinese economy seems substantial, the incentive to act this way is fully intact.
In short: expect more capital flight from China!
(Disclosure: short CNH, short AUD)