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Is The Market Being Deceived About The Pace Of Capital Outflows From China?
If you needed any proof that it is now all about China when it comes to the narrative that’s driving global capital markets you needn’t look much further than last month’s Fed decision.
The FOMC’s “new” (and by “new” we just mean that they have finally admitted to the reflexive nature of their job in the post-crisis world) reaction function has been characterized as a tacit acknowledgement that the Eccles cabal is now “market dependent”, but in reality, they’re simply “Beijing dependent” because at the end of the day, this is all driven by what happens in China.
Of course no data point emanating from the East is more important than that which shows just how quickly the PBoC’s stash of USD reserves is falling in the face of continued pressure on the yuan.
We won’t endeavor to recount the whole story here as we’ve documented it exhaustively over and over again since August 11 (a day that will live in infamy for FX traders), but the gist of it is simply that while China may indeed be planning on implementing a double-digit deval, it needs to be "controlled" (i.e. on Beijing’s terms) and so, expectations must be managed and that means dumping USTs by the hundreds of billions in order to prop up the yuan over the course of the transition.
This effort has added two spinning plates to Beijing’s collection: 1) onshore FX intervention, 2) offshore FX intervention, but as we've noted quite a few times of late, if one doesn't know what to look for, it would be easy to believe that the pace of the Chinese FX reserve burn is slowing but that - much like believing that because Copom uses swaps to protect the BRL there are no capital outflows in Brazil - would be a grave mistake. It’s with that in mind that we bring you the following rundown of the latest Chinese FX reserve data courtesy of the "smartest" guys in the room.
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From Goldman
Bottom line:
PBOC’s FX reserves decreased by US$43bn from US$3.557tn at end-August to US$3.514tn at end-September (vs. $94bn FXreserve fall in August), suggesting a slowdown in FX outflow. Nevertheless, additional SAFE and PBOC data, due to be released in the next two weeks, should also be useful to gauge FX flows.
Main points:
The People’s Bank of China (PBOC) reported that its foreign exchange reserves dropped by US$43bn in September (vs. $94bn fall in August), to US$3.514tn at the end of the month.
It is possible to get an approximate sense of the valuation effects stemming from currency movement: e.g., assuming the currency composition of the PBOC’s FX reserves broadly follows that of the average country’s (using the IMF COFER weights, which suggest roughly 70% in USD for EM countries), the currency valuation effect would probably be negative to the tune of roughly US$5bn (i.e., excluding currency valuation effects, sales of FX reserves might have been about $38bn based on today’s data). Today’s data suggest that the FX outflow situation moderated in September amid clearer policy signals to support the currency and macro-prudential restrictions to slow outflow.
Nevertheless, it is not straightforward to derive the actual FX-RMB conversion trend from headline FX reserves data. Besides currency movements, there could also be significant valuation effects from changes to the market prices of the PBOC’s investment portfolios, and those effects are hard to estimate given the uncertain asset composition. Moreover, there could also be possible short-term transactions and agreements between the PBOC and banks (e.g., forward transactions, FX entrusted loan drawdown or repayment) that may complicate the interpretation of the change in FX reserves.
In our view, a preferred gauge of FX-RMB conversion trend amongst onshore non-banks would be SAFE data on banks’ FX settlement on behalf of their onshore clients (to be out on October 22nd). That report captures banks' FX transactions vis-à-vis non-banks through both spot and forward transactions (for August this data showed an FX outflow of $178bn). But to assess the overall FX-RMB trend, including in the offshore RMB (CNH) market, other FX data sets such as the position for FX purchase would be useful supplements—these are not affected by valuation effects and include FX settlement between the onshore banking system and offshore banks, although they do not account for forward transactions. Data on the position for FX purchase covering the PBOC should be out on October 14, and similar data covering the whole onshore banking system (PBOC plus banks) should be released at around the same date, although this is not completely clear.
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The point is that, as Goldman noted last month, we need to take account not only of the PBoC's non-spot market intervention efforts in the offshore market, but also of banks' forward books if we want to get a better read on capital outflows in China.
In short, the headline figure from September probably isn't even close to reality, because as we documented a few weeks back, China had spent more than the reported $43 billion in the first two weeks of September alone and even that figure was probably far too low because banks appear to be using their own forward books to absorb some of the outflows.
The takeaway is that to the extent the overnight relief rally in the ringgit and then subsequently in other Asia EM "assets" was catalyzed by a "better" than expected read on the situation in China, the market may be making a mistake because just like Chinese GDP prints, the headline figure on the PBoC's store of FX reserves should be taken with a grain (or perhaps a whole shaker) of salt when it comes to drawing conclusions about the pace of outflows from the world's second most important economy.
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"In short, the [Chinese] headline figure from September probably isn't even close to reality..."
Do tell. Unreliable data out of China? Shocking.
Hah ha ha ha
Years ago (70's) we called it the Chinese truck plant syndrome. Year one they manufactured 1 truck. Year 2, 3 trucks, so output was up 200%.
And that of course, assumed that the numbers in any case, were real. As in Santa Claus and the Toof Fairy.
Tsk Knuck's, Santa is very disappointed in you......
No Peking Chaching
$3.5T is not enough. We must export moar usd.
(Equities down 1% in 45 minutes, and no news?):
http://www.investing.com/indices/us-30-futures-advanced-chart
That's normal. Probably means Dennis Gartman sent out his latest news letter where he announced he was once again bullish.
"The point is that, as Goldman noted last month, we need to take account not only of the PBoC's non-spot market intervention efforts in the offshore market, but also of banks' forward books if we want to get a better read on capital outflows in China."
Is that anything like auditing the fed? Do tell?
If one in five Chinese get their act together, it equals the entire US population.
If 10 percent do, it's about five times as many as the USA has. Just some rough numbers.
"get their act together" as in buying precious metals?
Better check your math though. Doesn't "one in five" mean 20%?
Only complete and total brain dead morons believe what comes out of a corrupt piece of shit communist's mouth.
Leave Washington & Obama out of this please
Sieve me, Sieve me!! (as in as leaky as a) Where is the Chinese version of BernankoRambo when you need him??
The Chinese government does not appear to be behaving like the next #1 economic power. Rather, they are still very much acting like a 'wannabee'.
They are not attracting Capital. It is leaving their shores -- no doubt with the able and willing help from the nice folks at the Goldman Sachs Shanghai offices.
If they don't fix the Capital Flight issues (the wealthy and the Oligarchs 'behaving unpatriotic'), they will be in big trouble.
They could, however, back their currency with the gold in the PBOC. Oh, wait... that too is being moved into Private hands.
Foolish is as foolish does.
http://www.bloomberg.com/news/articles/2015-05-28/china-says-its-most-wa...
China is stepping it's extradition of looters back to the homeland. Not only in the USA, but even in Canada, the gubmint has compiled a list of all the foreign owned properties in BC to "invesitgate."
Investing overseas for these folks can be going from the frying pan to the fire.
Why would you want to hold debt of a country that can't pay? T-bills are not assets (unless you are the US Fed). If you think the Chinese gold is leaving it's shores, well I'd like to see the proof (paper doesn't count).
The other point is that China has a population imbalance and it needs to be balance somewhere, usually somewhere where the population looks similar and the climate is similar.
If one is looking for an expanding exonomy, that isn't happenoing globally, balanced books is more important.
Oh, it's not just FX outflows, it's also INVESTOR outflows.
China's hard landing is going to be bone crushing, the biggest debt growth malinvestment in history that makes sub-prime look like absolutely nothing.
And, no, just because their banking system is fully government owned doesn't mean they can just write it off. Their financial and banking system doesn't exist in a vacuum. ALL of the US treasuries they own could be nulled to zero value with the stroke of a pen, but that can't be done for the same reason: no one would ever by US treasuries again, just as no one would ever again invest in China or buy RMBs if China simply wrote off its internal debts.
That's what Westerners love to believe... that Earth would stop spinning and fall into the Sun without their worthless, magnanimously printed currency.
ZIRP and NIRP will also hit China.Just a matter of time for everyone.An important event will happen very shortly and it'll be the decision at the IMF as to whether or not the western goon squads let China into the SDR.If they don't,I predict another big Yuan devaluation and a new wave of huge deflation along with a rising U.S. dollar.
Jim Rogers assures us all is well, says not to worry, and that China remains "the country of the future."
Strangely, he isn't returning my phone calls.
Why should he ? What are you selling ?
Try to master the sarcasm concept.
Maybe you should manage how to be sarcastic, first...
Dude, are you ridiculing china?
Look at that article, dude.
China decrease 180 B$ FX reserves? That is from MORE THAN THREE THOUSANDS, FIVE HUNDREDS BILLION DOLLARS WORTH OF FX RESERVES!!
Now compare that to 100 B$ of 1 (ONE) US company Glencore has. That 100 B$ debt from how many US FX reserves?
This is US Foreign Reserves value, dude.
http://www.tradingeconomics.com/united-states/foreign-exchange-reserves
You want to compared China FX reserves, to your shitty country, dude??
Read & Learns...
With T-bills selling at 0%, why wouldn't one sell excess and let it go (home)?