Why Is There A $71 Billion Difference Between China's FX Reserves And... China's FX Reserves?

Tyler Durden's picture

Zero Hedge has been following the topic of Chinese FX reserves, and specifically their change over time, with great interest, as this (presumably) primarily dollar-denominated amount is the critical "dry powder" that our key foreign purchaser of Bonds, Notes and Bills uses when bidding on Treasury Auctions. Should China's FX reserves decline, or be forcibly diversified, the amount left over for UST purchases will be correspondingly less at a time when every UST auction could be the last should PDs, Indirect and Direct bidders not have enough bidding interest to cover growing supply. As China is very secretive about the composition of its FX reserve portfolio, there is usually a lot of guess work involved in tracking where and how the money flows. What we do know, according to a January 15th report by People's Bank of China (PBOC), is that in 2009 FX reserves increased by $453.1 billion to a total of $2.399 trillion... Or so we thought. Yesterday China's official State Administration of Foreign Exchange (SAFE) released an update on FX reserves, according to which FX reserves increased... by only $382.1 billion, a $71 billion differential from the PBOC's number. (an English translation of the SAFE page can be read here).

We quote from the PBOC's December 2009 Financial Statistics report:

At end-December 2009, China’s foreign exchange reserves reached USD2.3992 trillion, registering an increase of 23.28% year on year. In 2009, official foreign exchange reserves rose by USD453.1 billion, adding USD35.3 billion year on year. In December, foreign exchange reserves expanded by USD10.4 billion. At end-December, the RMB exchange rate stood at RMB6.8282 per USD.

Next we quote from SAFE:

China's international reserve assets of 393.2 billion U.S. dollars of change. Among them, foreign currency reserve assets of 382.1 billion U.S.
dollars deal of change (excluding the exchange rate and price changes
in the value of non-trading effect), special drawing rights increased
by 108 million U.S. dollars in IMF reserve position increased by 3
billion dollars.

Even for China, this is a very large discrepancy and its existence could be due to several key reasons.

  1. FX rate calculations and mark to market result in a substantially negative impact on the actual notional of FX holdings. This is starkly at odds with expectations of how the PBOC operates, as pundits have long believes the PBOC's reserve data reflects not only exchange rates (these are FX reserves after all, not some Bank of America Level 3 asset) but also asset valuations. Indeed, if this is the true explanation, it casts into doubt all other PBOC data that is supposed to be adjusted for MTM differentials.
  2. There has been a "factual" discrepancy between the two reporting agencies, and the differential is a simple slip. In light of much speculation that China tends to misrepresent data, this would not be very surprising, although somewhat blatant, instance of being caught "red handed."
  3. The two numbers are correct, to the extent data is available. As SAFE is the primary custodian of actual FX data dissemination, there may have been a less than overt cash outflow, of which the PBOC was simply unaware. Whether the use of funds was buying and transferring bearer bonds from Italy to Switzerland, buying several tons of gold, or taking down several auctions as a direct bidder, we are confident China could have found a willing recipient of the cash.
  4. This indicates that China may have well diversified its existing FX base away from dollars far beyond what has been projected. The $71 billion is roughly 3% on the total FX reserves of $2.4 trillion. Analysts estimate that of China's FX holdings at least 66% is dollar-denominated, 20% is in euros, and the remainder is in secondary currencies such as JPY, GBP and  CHF. Obviously there would be no MTM variation on the dollar denominated assets, and assuming the delta comes from euro holdings, a $71 billion variation on an estimated $480 billion in euro notional is a stunning 15% - this means that China has not accounted for virtually the entire change in the relative value of the EUR/USD pair over 2009.

We will follow the PBOC's future releases closely and superimpose SAFE data on them to see if the two numbers somehow miraculously converge. With China and the US rapidly approaching a full trade war detente, which would severely cripple the rate of growth of USD FX reserves, having a credible indication of just what the real FX number is, becomes increasingly relevant.