China Reserves Jump Most In Three Years; Hedge Fund Asks "Is This The End Of The Yuan Bear Market?"

Tyler Durden's picture

In all the drama surrounding the French elections, few noticed the PBOC's announcement that China’s FX reserves rose for the third straight month in April, increasing by $20.45 billion to $3.03 trillion, more than the $11 billion expected and the single biggest monthly increase in three years going back to April 2014, on the back of a weaker dollar and increasingly more draconian capital controls on outflows.

Cited by the WSJ, some economists attributed April’s increase to a dollar that continued to decline in the past month especially after Trump said the U.S. currency “is getting too strong.” The value of other currencies in China’s reserve basket, including the euro, the British pound and Japan’s yen, similarly played a significant role in the rise, said Yan Ling, an economist with China Merchants Securities.

Besides USD softness (USD has weakened against the CFETS basket by over 2% year-to-date through April) and perhaps stronger RMB sentiment, the capital flow management measures introduced over the last several months have also contributed to the slowdown in outflows, Goldman speculated in a Sunday note. That could reverse, as there may be incremental relaxation of the capital account as the flow situation has improved and an overly tight capital account could hinder legitimate international trade and the authorities' long-term RMB internationalization goals.

“Downward pressure on the currency has significantly subsided thanks to capital controls introduced in late 2016 and early 2017,” Dariusz Kowalczyk, a Credit Agricole economist, told Bloomberg. “This means that going forward, depreciation will be very gradual.”

However, any systematic roll-back of capital controls is unlikely in the near term, given it is still uncertain as to whether and how fast outflows could pick up again in case the USD re-strengthens significantly, Goldman adds. Furthermore, some degree of capital account restrictions could beneficially help reduce volatility during the process of exchange rate liberalization. “The Chinese central bank no longer cares that much about the level of exchange rate. Rather, they now care more about the basic stability of the foreign-exchange reserve,” said Zhou Hao, an economist with Commerzbank AG .

Or perhaps it's none of the above, because in a separate analysis Goldman calculates that after adjusting for currency valuation effects, reported reserves remained unchanged.

"We estimate currency valuation effects at about +US$19bn, given the notable appreciation of GBP and EUR against the USD during April. Excluding such estimated effects, reported FX reserves would have increased marginally by US$1bn (vs. a decrease of around US$4bn in Mar)", Goldman's MK Tang wrote in a report over the weekend. Other confirmed: “In addition to valuation effects, stronger trade data as well as dented capital outflows should be responsible for this slight rise,” said Frederik Kunze, chief China economist at German lender NordLB in Hanover.

“April’s reserve increase reflects a combination of valuation effects, tighter capital controls and a more stable yuan,” Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a note. “At the start of the year, there were genuine concerns China faced another flood of capital outflows. That clearly hasn’t happened.”

As usual, subsequent data on the PBOC's FX position and SAFE flow data will be key in determining the true direction and size of China's latest FX flow situation. These can be expected as follows: SAFE data on FX settlement onshore and cross-border RMB flow: May 17; PBOC FX position (spot; net of valuation effects): around mid-May; PBOC reported forward position: end-May.

* * *

And while it is still early to speculate whether China's capital outflows have ended, Horseman's Russell Clark has done just that and in a recent report wonders if we have seen "The End Of The Chinese Yuan Bear Market." Some excerpts from his recent note below:

The Chinese Yuan (CNY) was fixed for many years before beginning to appreciate in 2005. Since 2014 it has been in a weakening bias, as the US dollar has been relatively strong. Part of the weakness in the CNY was due to China cutting interest rates from 2015 to help prop up growth. This greatly reduced the relative spread between interest rates between China and the US and put pressure on the currency. (Shanghai Interbank Offer Rate (“Shibor”), London Interbank Offer Rate (“Libor”)). 



As can be seen the divergence between interest rates is now beginning to move in CNY’s favour.



As rates were cut and the CNY weakened, there was a large outflow from both foreigners and locals. One example is the movement out of CNY by Koreans. This collapse in foreign exposure to China is confirmed by Bank of International Settlements (“BIS”), although this data is only to q3 2016.



What I find interesting is that the currencies of countries with strong trade links to China, namely Taiwan and Singapore, were good early signals to an imminent Chinese devaluation in 2014. These currencies, and particularly the Taiwanese dollar have strengthened considerably recently.


Intriguingly the interest rate needed for offshore CNY deposits in Hong Kong has fallen below the mainland rate for the first time since 2015.



As can be seen, Hong Kong deposit rates can fall below the mainland rate depending on the locals’ view of the CNY exchange rate. Given the reduced positioning of foreigners in CNY, the flattening of the banks’ foreign currency positions in Chinese banks, the strengthening of CNY proxy currencies and the implied bullishness of Hong Kong depositors on the CNY, the CNY looks more likely to appreciate than depreciate from here.

Read the full Horseman note here.

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Dazman's picture



Arnold's picture

I ask, who put out this number?
Yeah, the 5 year plan.

Arnold's picture

I read the article.
Such smut should not be put out without an adults only warning.

Never mind, there are few enough adults in the room to make a difference.
I label it, imaginary stuff and leave it in the ditch there, next to the cow fertilizer.

SolidAssets's picture

she was a waitress in a cocktail bar now she owns a jet...

Quantum Bunk's picture

Lol Kyle Bass and his Yuan bet. USD is trash

Yen Cross's picture

  Gold is going batshit crazy. They slammed it down to $1220.00 on the open and now it spiked back up to $1234.00ish.

logicalman's picture

I wouldnt call just over 1% batshit crazy.

sinbad2's picture

The US sells down paper gold, to prop up the US dollar, the Chinese sell US dollars, to buy gold.

The US just creates dollars out of thin air, and so it's pretty hard to value, but the Chinese gold, probably more than 20 thousand tons is very real.

As China soaks up global supplies of gold, the US is forced to print more money, to keep the gold value down.

Recently the US burnt a billion dollars, to lower the price of gold, but it didn't have much effect, so the US burnt another billion.

Today we will most likely see the gold price rising again, and the US will spend another billion to hold down the gold price. The price of an ounce of gold in Shanghai right now, is US $1243.28, 13 bucks more than when the US markets closed on Friday.

The US holds down the price of gold, to make the US dollar look good, but creating large amounts of dollars devalues the dollar?

Bay of Pigs's picture

This bitchez....^^^^^^^^^^

DingleBarryObummer's picture

I want to understand the basic jist of this article but it's over my head.  What does this mean...  The Yuan has appreciated compared to other currencies?  Or are they accumulating more USdollars?  Why would the bear market be over?  Thanks in advance.

NoDebt's picture

China has "pegged" the Yuan to the Dollar at a nearly fixed rate of exchange (only allowed to float in a very narrow band).  If the actual market value of the Yuan relative to the Dollar is lower than the peg, the FX market will try to push the Yuan below the "peg".  In order to stop this from happening, the Chinese central bank sells a portion of their vast Dollar holdings.  This pushes the value of the dollar down (relative to the Yuan) and the value of the Yuan up (relative to the Dollar).  They can maintain the artificially high "pegged" exchange rate vs. the Dollar by doing this.  And that's what they've been doing for several years now- burning through their Dollar reserves to maintain the "peg".

BUT, as they say, "you can only piss down a hole for so long."  One of two things can happen at that point:  Either your bladder finally runs dry (China runs out of Dollar reserves to sell to support the Yuan) or the hole fills up (no need to keep selling Dollars to support the Yuan because the market stops fighting you).  Since their reserves have apparently stabilized over the last few months this would tend to indicate that the hole has filled up.

A constantly depreciating Yuan might be good for their exports, but China also has a massive problem with "capital flight".  Every newly minted Chinese billionaire's first order of business is to get their money the hell out of China for fear of having it either confiscated or devalued away.  So they fight that both by supporting their currency's value AND by draconian laws that attempt to prevent their citizens from taking their money out of the country.  Each tactic supports the other.


DingleBarryObummer's picture

Ok thanks, that is helpful.  Now when I read future articles I will be a little more prepared to understand them.

logicalman's picture

Believe half of what you see and none of what you read.


Arnold's picture

But..., that is only what the public sees, including us.
the private machinations of the Chinese are unknown unknowns.

There was a stair step chart of their lending rate that I have no inclination to find, that was their official, interbank lending rate.
It increased 1 basis point per month I remember correctly.
Much like the stuff our governance puts out, it is Wacky.

pitz's picture

Only problem is, this 'capital flight' isn't really happening.  Domestic Chinese deflation is a bigger factor, as there is extreme investment in China rather than exporting of personal wealth or reserves overseas. 

RawPawg's picture


Stormtrooper's picture

"Trump said the U.S. currency “is getting too strong"

WTF does Trump know about valuing a currency.  The only thing that makes one currency more valuable than another currency is if the paper in the bills contain more usable BTUs for cooking or heating than some other currency.  Otherwise, their intrinsic value for all of them is zero.

Arnold's picture

I have a neighbor that worked, and still does, as a consultant to the logheads.
Her job,was figuring how Lockheed should charge clients on exactly what your stupid ass is saying.
Shut up and learn your trade.

DaBears's picture

China can report whatever it wants, no one is able to verify what they claim.

sinbad2's picture

The same applies to the US, we all know the US economy is collapsing, but the US keeps putting out false data to hide the collapse.

Even this story conveniently leaves out that China has been selling US dollars, to buy gold, but doesn't declare its true gold holdings.

They all lie.

ds's picture

It take 3 RMB of debt to produce 1 RMB of goods and services. Exports with subsidies from money printing is unbeatable with the resultant trade surplus. The obverse of the current account is the capital account. Reserves manufactured by debts ...cheer them on. When there is uncertainty on the RMB it is not risk, it is you do not know what you do not know. It depends on the rotation of faith in the RMB much less liquid for exit than the dollar. 

You really think that the spinnners know.They have to publish something to keep their paychecks. Take them seriously if they have their skins in the game by asking for 2 way quotes. 


francis scott falseflag's picture

"Since 2014 it has been in a weakening bias"

"Taiwan and Singapore were good early signals to an

 imminent Chinese devaluation in 2014."


Don't decieve yourselves. The weakening yuan in 2014

and the imminent Chinese devaluation in 2014