Chinese Reserves Data Fail to Give Full Picture as Dollars Sold

  • Unexpected numbers beg closer examination of factors at work
  • Some economists have questioned transparency of the figures

One way to interpret the unexpected increase in China’s October foreign-exchange reserves is to see an improving outlook for the economy and capital flows. A closer look at the data suggests a far more complex story.

A Saturday release from the People’s Bank of China showed cash stockpiles rising for the first time in six months, to $3.53 trillion from $3.51 trillion at the end of September. This development comes against a backdrop of massive dollar selling by the central bank and state-owned lenders as the government strains to stem record money outflows.

Several missing pieces from the headline number give a fuller picture.

Here are three:
* The PBOC is intervening in the yuan forwards market instead of selling reserves directly, using derivatives rather than hard cash to fight the unprecedented exodus.
* A record trade surplus, driven by dwindling imports, may have helped the central bank accumulate reserves last month.
* China’s bid to join the International Monetary Fund’s basket of reserve currencies might also have temporarily deterred outflows.

“You cannot just purely look at that number as far as the capital flow is concerned,” Alexander Wolf, an economist at Standard Life Investments, said by phone from Edinburgh. “It’s just one aspect of it.”

‘Mendacious’ Data

A relative lack of transparency has kept investors guessing on the degree of outflows China is facing. Bill Gross, former head of Pacific Investment Management Co., branded the nation the “mystery meat of emerging-market countries,” while Citigroup Inc.’s top economist Willem Buiter has called the government statistics “mendacious.” The ability to decipher the data has become vital to international investors as they rank weakness in the world’s second-biggest economy among the biggest risks to markets.

The PBOC and local lenders have increased their holdings of onshore forwards throughout this year, positions that would boost China’s currency against the dollar. Using derivatives for intervention had the benefit of delaying any decline in the PBOC’s war chest, helping calm investors rattled by an economic slowdown and a slumping stock market.

Also, when measured against the record $61.6 billion trade surplus, the $11.4 billion increase in reserves suggests outflows from the capital account persist, according to Nomura Holdings Inc. Imports contracted 18.8 percent in October from a year earlier, outpacing the 6.9 percent drop in exports, alleviating outflows from trades and helping the PBOC accumulate foreign currencies derived from account receivables.

Still Challenging

"Even if there’s broad capital flight, China’s trade surplus and net foreign-direct investment surplus remain large, and will be at minimum an offsetting factor," Nomura economists, including Yang Zhao in Hong Kong, wrote in a research note. "Ahead, we still expect the overall capital flow backdrop for China to remain challenging and there are still likely to be periods of relatively large capital flight."

Yuan Advances

Steven Englander at Citigroup Inc. agrees. The global head of Group-of-10 foreign-exchange strategy said local Chinese investors eager to ship money abroad may take comfort in the authority’s successful attempt at stabilizing the currencies market ahead of the IMF’s review of the Special Drawing Rights, the fund’s unit of account, which is due this month. The onshore yuan rose 0.6 percent in October, the most in seven months, rebounding from the turmoil sparked by the PBOC’s sudden devaluation on Aug. 11. The currency was trading 0.03 percent higher at 6.3605 a dollar in Shanghai on Tuesday.

"If you’re a Chinese resident and intending to try to move capital out you may have paused in October thinking the destabilizing effort provides a longer window than you may have otherwise," New York-based Englander said by phone. "The Chinese authorities have a lot of incentives to stabilize the yuan in the run-up to the SDR. Once they’re in, those incentives diminish."

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