When the PBoC reported the change in Chinese FX reserves for October, some were surprised to learn that apparently, Beijing’s warchest actually grew by $11 billion.
Why was that surprising? Because over the preceding three months, China had liquidated some $300 billion [9] in USTs as Beijing struggled to contain the fallout from the “surprise” August 11 deval.
As it turns out, manipulating the spot to control the fix (versus manipulating the fix to effectively reset the spot) entails quite a bit of intervention when everyone is banking on continued depreciation. So, in order to contain the devaluation and close the onshore/offshore spread, China tapped its FX reserves to ensure that yuan weakness would be “managed” and would unfold on Beijing’s terms, not the market’s.
But October’s reserve data seemed to indicate that suddenly, the pressure on the yuan had dissipated and the outflows had ceased. We would later discover that when you look at the bigger picture which includes bank settlements and forward transactions, the outflows continued unabated during October.
On Monday, we got the latest data from the PBoC which shows that during November, China’s reserves fell by around $87 billion. Stripping out valuation effects, the figure is probably closer to $40 billion (in other words, China probably sold some $40 billion in US paper during the month).
“The figure may not capture all the PBOC’s intervention efforts as the central bank also transacts in the forwards market to support the currency,” Bloomberg notes [11]. And here’s the customary warning from Goldman: “...headline FX reserve data may not necessarily give a comprehensive picture on the underlying trend of FX-RMB conversion by corporates and households.”
In other words, the headline figure likely underestimates the pressure on the yuan and as usual, we won’t get a clear picture for at least another week. Here’s Goldman:
In our view, a preferred gauge of the FX-RMB conversion trend amongst onshore non-banks would be SAFE data on banks’ FX settlements on behalf of their onshore clients (to be out on December 17th). That report captures banks' FX transactions vis-à-vis non-banks through both spot and forward transactions. Data on the positions of FX purchases will likely be out around mid-December.
The headline figure represents the third-largest decline on record and as FT reminds us [12], China's official reserves have fallen in nine of the last eleven months. "The unprecedented declines have raised worries that the reserves could quickly evaporate if capital outflows continue and the central bank continues to defend the exchange rate," FT adds.
Of course capital outlfows most certainly will continue. Indeed, the fear is that Beijing is in fact targeting a deval on the order of some 20% in order to resuscitate the country's flagging economy and it's not clear that the expected inflows from SDR inclusion will be sufficient to offset the inexorable capital flight facilitated by end-arounds like the UnionPay ruse and the country's network of "Mr. Chens [13]." "China in recent months has tightened its already stringent capital controls to keep needed funds within the country," WSJ notes [14] (see our full account here [15]).
“Since October many countries around China have experienced some capital outflow, and China has had its share. The strengthening dollar is bound to cause some repositioning into dollar assets," Xie Yaxuan, economist at China Merchants Securities in Shenzhen said on Monday, reinforcing the notion that a Fed hike may well exacerbate the pressure on China and other EMs.
“Although a weaker renminbi could give a mild boost to export competitiveness, the PBOC appears concerned that a depreciation would set back their efforts to encourage increased international use of the currency and could slow the process of economic rebalancing toward consumption,” Capital Economics says, suggesting that Beijing isn't likely to simply let the yuan go now that SDR inclusion is secured. Further, if the headline figure net of valuation effects suggests a $40 billion drawdown, the figure inclusive of unsettled forwards will likely be far larger.
In any event, you can expect the outflows to continue unabated if for no other reason than the fact that while no one is quite sure where the yuan goes from here, the general consensus is that over the long haul, the trend will be towards a weaker exchange rate in the absence of an abrupt economic turnaround. That means that up to and until Beijing finally moves to an honest float, FX reserves will continue to fall, "Mr. Chen" will contine to run a lucrative business, and bitcoin may well find favor among Chinese looking to move money out of the country without buying grossly overpriced real estate in Manhattan or London.

