If one looks at China's reserve data released by the PBOC, one would be left with the impression that China's capital outflows - the bogeyman that sent global risk assets tumbling in late 2015 and early 2016 - have moderated notably in 2016 after the surge during the summer of 2015 and in early 2016. However, as we explained previously, the PBOC has a habit of hiding what is truly happening below the surface, using legitimate mechanisms such as forward contracts,as well as some less legitimate ones. So to get an accurate perspective of what is happening with China's fund flows, one has to look at a monthly dataset provided by SAFE, which presents the capital flow data in a way that can't be "fudged."
As a reminder, according to PBOC official data, China’s currency reserves fell by $18.79 billion in September to $3.17 trillion. The drop was larger than the $11 billion fall estimated and followed a drop of $15.89 billion in August and was the largest monthly decline since May. However, in what will surely be a troubling sign to Yuan bulls, not to mention all those who believe another burst of Chinese capital outflows can destabilize the market (as China is forced to dump US denominated reserves), Goldman has found that the real outflow in September was vastly greater: more than 4 times the official number, and the highest since January, an indication that the capital outflows are once again picking up substantial pace.
As Goldman's MK Tang writes in a note released overnight, his preferred gauge of FX flow (based on SAFE data) shows that FX outflows rose to US$78bn in September (from US$32bn in August). The particular gauge incorporates information on both onshore net FX demand by non-banks and cross-border RMB movements.
Here are the details from Goldman:"As in the last few months, we focus on two separate sets of SAFE data to gauge the underlying FX flow situation: one on onshore FX settlement, and the other on the cross-border movement of RMB."
- According to the first SAFE dataset on onshore FX settlement, net FX demand by non-banks onshore in September was US$33.3bn (vs. US$4.6bn in August). This is composed of US$22bn via net outright spot transactions, and US$11.2bn via net freshly-entered forward transactions.
- The second SAFE dataset on cross-border RMB flows shows that net flow of RMB from onshore to offshore was large at US$44.7bn (vs. $27.7bn in August). As we have discussed previously, in our view, such cross-border flow of RMB could not be readily explained by market-driven factors and needs to be taken into account when measuring net FX flow.
As Goldman sums up its preferred gauge of underlying flow "indicates a net FX outflow of US$78bn in September (US$33bn from net FX demand onshore plus US$45bn in FX outflow routed through the CNH market)."
FX outflow picked up to US$78bn in September
Source: SAFE, Goldman Sachs Global Investment Research
Observing the vast discrepancy noted above, Goldman adds that besides today's data, the PBOC had earlier released two other related FX data points for September: "one is the widely-followed FX reserves data (out on Oct 7), which fell US$27bn, after adjusted for our estimate on currency valuation effect. Another one is PBOC's "position for FX purchase" (out on Oct 18), which captures PBOC's net sales/purchases of FX. A difference between this data and FX reserves is that it is net of any valuation effects. This data suggest that PBOC sold about US$50bn in September--it is the biggest fall since January this year, and signaled large underlying FX outflow in September (there may be special factors such as FX transfers to other financial institutions to support their one-belt-one-road initiatives--we await further information, e.g., PBOC balance sheet data, to have a clearer idea about the possible size of these factors)."
It then makes it clear that today's SAFE data confirm this signal; and indeed the measure suggests even faster underlying outflow than indicated by the data on the PBOC FX sales.
Goldman also notes that the difference between the position for FX purchase data and the FX reserve drop after adjusted for estimated currency valuation effect was particularly large in September (US$23bn, vs. monthly average of about US$10bn for Jan-Sep this year).
Cumulatively since the beginning of the year, the gap between our measure of underlying FX outflows and what is suggested by data on PBOC's FX reserves or position for FX purchase is significant. Year-to-date through September, FX outflow according to our measure totaled roughly US$500bn, while implied FX sales suggested by reserve data and position for FX purchase were approximately US$200bn and US$300bn, respectively. Exhibit 1 shows our FX flow gauge.
Considering that as a result of the suddenly resurgent dollar, which overnight hit a 7 month high, and in turn led to the biggest drop in the Yuan since August, and the weakest print in the CNH since 2010, we are confident the outflows will only accelerate in October, and the complacency surrounding the biggest threat to China's economy will be promptly crushed, potentially resulting in another "late 2015" episode in which the only thing that mattered to global stocks was the daily Yuan fixing and the monthly reserve flow report.