After three consecutive declines in China's Foreign Reserves in the November-January period, which averaged nearly $100 billion per month (with particular attention paid to last month's number), consensus expectations were for a moderation in reserve outflows in February to approximately $40 billion in February; moments ago the PBOC reported, that as expected, reserve outflow "slowed down" to just $28.6 billion, bringing China's total foreign reserves to $3.2 trillion, the lowest level since late 2011.
According to Goldman, accounting for currency valuation effects could amount to around +US$10bn, and therefore sales of FX reserves might have been about US$39bn in January (vs. estimated $89bn in January). In any case, with the February drop, Chinese total reserves are back to levels not seen in over 4 years.
One factor for the slowdown in Chinese capital outflows may be the relative stability of the Chinese currency, which after suffering a substantial devaluation at the end of 2015 and early 2016, has since stabilized to levels during the start of year fixing. As Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd., told Bloomberg "financial markets were more stable last month compared with January and the sentiment toward the yuan has improved. Capital outflows may slow down in the second half of this year if economic fundamentals improve."
Policy makers have been burning through their stockpile to help stabilize the currency, a key goal for China’s leaders, who are gathered this week for their annual policy meeting in Beijing. The nation’s defense of the yuan depleted its foreign reserves by $513 billion last year, while Bloomberg Intelligence estimates that a record $1 trillion of money moved overseas in 2015.
According to one theory proposed by the BIS, "persistent capital outflows from China since mid-2014 were probably driven more by local companies paying down dollar-denominated debt -- in anticipation of a stronger U.S. currency -- than investors ditching assets." Those same BIS experts have probably never had the please of bidding for an abandoned house in Vancouver for $7 million, a local housing bubble which is precisely a function of local investors taking their money offshore in a panic.
Finally, recall that just two weeks ago China stopped reporting the "position for forex purchase” a series which tracked total foreign exchange purchases by both the central bank and other financial institutions. Many - us included - saw this as a premeditated attempt to confuse market watchers and prevent the full picture of Chinese outflow data from emerging. As such one will surely take the PBOC's reserve data with an excess capacity-producing mine of salt. This is Goldman's take:
As we have discussed previously, however, headline FX reserve data do not necessarily give a comprehensive picture on the underlying trend of FX-RMB conversion by corporates and households. This is not necessarily related to any accuracy issues of reserve data, but is due to the fact that valuation effects are uncertain and that other non-PBOC financial institutions may also use their balance sheet to absorb underlying flow pressures. Correspondingly, the PBOC or related entities may have accumulated forward positions that do not affect reserves immediately.
In our view, a preferred gauge of the FX-RMB conversion trend amongst onshore non-banks would be based on SAFE data on banks’ FX settlements on behalf of their onshore clients. That report captures banks’ FX transactions vis-à-vis non-banks through both spot and forward transactions, and will be out on March 16 (we discussed the coverage and definitions of various official FX data sets in Asia Economics Analyst: Sizes and Sources of China’s Capital Outflows, January 26, 2016).
In other news, China reported that the value of its gold reserves jumped to $71 billion from $63.6 billion a month ago, with the actual inventory of reported gold rising from 57.18 million in January to 57.5 million as of last month.