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.

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Renfield's picture

Most intriguing. Thank you for pursuing this - I will be most interested in future follow-ups.

My guess is Option #3, as this would be in keeping with China's statements over the past year. Option #2 also sounds rather possible - I agree #1 sounds pretty unlikely.

Not sure how to evaluate Option #4...if 15% is not accounted for, then where is it? I don't understand that paragraph very well.

dr_teeth's picture

Somebody in China is going to be shot (commit suicide/disappear) over this discrepancy.

Sisyphus's picture

OT. Where is Marla? Vacation? Or have you and her decided to go separate ways? Haven't seen any posts from her in ages? 

Tyler Durden's picture

Marla is here... hiding somewhere

Mr Lennon Hendrix's picture

I like #4; liquidated FX into gold holdings?  Gold looked really strong today, and it was before the JPM "put".  Gold leveled last night in asia, and made it through a cac slap afterwards as well.

Renfield's picture


Just as the US & UK don't really tell how little gold they have...

So China & Russia will never really tell how much.

If that's gold, then I reckon it gonna remain 'unaccounted for'. ;-)

chinaguy's picture

No way to tell, but Occam's razor says it was a slip up, but, they don't really GAF.

It's not like this is going to be anything but one paragraph printed on page 47 of some obscure journal in China. No one there is going to put his neck on the block for something that can not be proved.

carbonmutant's picture

Good stuff as usual, Tyler et al.

It will be interesting to hear their explaination...


Kissy Ass's picture

LoL. They owe an explanation? Funny how people really believe shit like that.

It's also funny how people believe that everyone must follow the rules set by the US, no matter how often they change, no matter how unequally they are enforced. Manipulated, obfuscated, fraud-ulated.

Wake up dummies.

Invest where there will be the greatest amount of growth potential. China.

Anonymous's picture

You mean, like, maybe invest in chinese CRE? A lot of great potential, indeed, just like a cannon bullet going up achieves a lot of potential... to fall back down I guess...

Oracle of Kypseli's picture

Or the greatest potential for another revolution, if things turn sour.

Cognitive Dissonance's picture

"........a $71 billion differential from the PBOC's number."

Hell, that's a sovereign nation's equivalent to loose change found beneath the sofa cushions these days. Or a rounding error for Goldman Sachs when tallying up the quarters profits. Or end of business day floor sweepings at the Federal Reserve.

Now, tack on a few additional zeros and you might actually be on to something. You know, a trillion here, a trillion there, after a while it begins to add up to serious money.

Glen's picture

Option 5 - Rounding error. At 3% of total FX reserves and a system notorious for rubbery figures, the books will never balance.

jomama's picture

i presume you're posting this from a 'safe' location?

tom a taxpayer's picture


Are we going to hold China to a higher standard of auditing than the U.S.?  When we have the Federal Reserve stonewalling an audit of trillions of $, are we  going to quibble about $71 billion in China's FX? While the U.S. destroys accounting standards at big U.S. banks by willfully gutting FASB, are we going to question $71 billion at PBOC?

Yes, all banks foreign and domestic need to be scrutinized and audited. And it is important to track the PBOC. And the federal reserve is relentlessly scrutinized by ZH. But it would be nice to have an audit of the Federal Reserve that gave a $71 billion level of precision or accuracy.


jeff montanye's picture

yes it damn sure would.  can it happen?

JuicedGamma's picture

Amazing that the Chinese have continued to buy US Treasuries meanwhile complaining all the while about the state of the US finances. Probably they've caused some of problems through meddlesome exchange rates and unfair trade policies. I believe they helped enable the low interest rates that were behind the stupid low long rates of the past 10 years. Of course they don't see it, after all they are the communist party, they believe in five year plans, fixed currency rates, censorship, and probably the takeover of private assets if they don't like what your company is doing. Just ask Google.

Anonymous's picture

laws are funny.....they're invisible

suteibu's picture

I'll bet analysts couldn't tell you the true population of China within 3%.  What's the surprise?

Anonymous's picture

god and death and life are one

Anonymous's picture

That is because China bought around 2300 metric tones of gold. They have been secretly buying gold for years.

Get_to_the_choppa's picture

71 Billion will buy you a lot of gold plated tungsten.  Just sayin'.

Anonymous's picture

Or maybe the numbers just refer to a different point in time

Stu's picture

so whats the big deal ?

Anonymous's picture

Probably just secretly stockpiling commodities -- like lead and melamine....

godfader's picture

China's government accounting and statistics is run by Bernie Madoff. Anybody accusing the US of cooking the books has no idea what's going on in China.

junkyard dog's picture

I am going with #2. The country spends every waking moment lying about everything and watching the US news outlets suck it down like water.

Keep buying those made in China toys for your kids. We need China, just ask CNBC.

We need China like I need worms.


Anonymous's picture

"Whether the use of funds was buying and transferring bearer bonds from Italy to Switzerland,"

LOL. I saw what you did there.

Anonymous's picture

But Tyler you yourself revealed that the Treasuries are being largely purchased by the HOUSEHOLD sector.

Mom, kids, apple pie. Little pink households for you and me.

71 billion is chump change

in Zimbabwe!

In the words of Axl Rose

where do we go
where do we go
where do we go

eye eye eye


Anonymous's picture

The PBoC’s reported reserves are a lot more than $2 trillion, and that if correctly accounted they would be pretty close to $3 trillion.


Kayman's picture

China lies. And they do have plan. Obfuscate and Manipulate.

So long as American politicians continue to Kowtow to China, this country will remain in our current quagmire. And it will get worse.

China has sold inferior junk in exchange for U.S. dollars and our government is doing the wiggly-jiggly instead of stopping the insanity.

Until we stop outsourcing American jobs, outsourcing American technology for free, and financially pumping up the political and economic power of the Chinese Communist Fascist state, we will get weaker by the day.

For those seeking the highest return because of China's purported growth (and growth potential) just look to Nazi Germany of the 1930's. Incredible growth by "dictat" never lasts. It ends in blood and tears.

dumpster's picture

China lies


from mad magizene


spy vs, spy 

Anonymous's picture

Here is your answer for the diffence


Add some commissions in there and perhaps some imf gold and voiola!

Anonymous's picture

Well this is an intriguing angle on what China may be up to re 'reserves'.
Just another angle to consider. May have merit.