China's True FX Outflows Since August 2015 Are $1.1 Trillion, Double The Official Number

Two months ago, when looking at an alternative measure of Chinese capital outflows using SAFE data, Goldman found that contrary to official PBOC reserve data, "China's Capital Outflows Are Soaring Again", having hit $78 billion in September.

Over the weekend, and following the latest PBOC data which revealed an outflow of $56 billion in November (which was only $34 billion when FX adjusted), Goldman repeated its FX flow calculation using SAFE data, and found the China continues to mask the full extent of its outflows, which in November spiked to $69 billion, and that "since June, this data has continued to suggest significantly larger FX sales by the PBOC than is implied by FX reserve data", once again suggesting that China is eager to mask the true extent of reserve outflows, perhaps in an attempt to not precipitate the feedback loop of even further panicked selling of Yuan and even more outflows, and thus, even more reserve depletion.

According to Goldman's MK Tang, money has been leaving in yuan payments for 14 consecutive months, while the central bank’s yuan positions have slumped the most since January. The situation could get worse, said Banny Lam, head of research at CEB International Investment Ltd, cited by Bloomberg.

“Capital outflows and yuan depreciation will continue or even worsen by the end of this year and the first quarter of 2017, as investors are getting increasingly concerned about a stronger dollar and China’s economic conditions," said Hong Kong-based Lam. "The yuan will reach 7 very soon. Policy makers will keep tight capital control in the near term but will continue to internationalize the currency in the long term."

Back to Goldman's analysis, which demonstrates just how serious China's ongoing FX outflow problem is, an oddity considering the market's rather oblivious shrugging at an event which last year sent the S&P500 just shy of a correction heading into the new year:

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SAFE data suggest FX outflow picked up in November to US$69bn

Bottom line:

Our preferred gauge of FX flow (based on SAFE data) shows that FX outflows rose to US$69bn in November (from US$40bn in October). Separately, data on “PBOC’s FX position” released two days earlier suggests FX sales by the central bank at $56bn in November (while headline FX reserves dropped by a smaller amount of $34bn, after adjusting for our estimate of the currency valuation effect).

Main points:

As in the last several months, we focus on two separate sets of SAFE data to gauge the underlying FX flow situation:

  • According to the SAFE dataset on “onshore FX settlement”, net FX demand by non-banks onshore in November was US$35.6bn (vs. US$11.4bn in October). This is composed of US$25.6bn via net outright spot transactions, and US$10.1bn via net freshly-entered forward transactions.
  • Another SAFE dataset on “cross-border RMB flows” shows that net flow of RMB from onshore to offshore was US$33.6bn (vs. $29.0bn in October). We incorporate this data in our measure of net FX flow, for reasons we have discussed previously (see here).

Our preferred gauge of underlying flow therefore suggests a total net FX outflow of US$69.2bn in November (US$35.6bn from net FX demand onshore plus US$33.6bn in FX outflow routed through the CNH market). This is an acceleration from the recent pace of around $50bn/month since June. Exhibit 1 shows our FX flow measure.

Exhibit 1: FX outflow picked up to US$69bn in November

The FX outflow indicated by our measure includes FX sales by both the PBOC and other Chinese financial institutions. To assess sales by the PBOC alone, two different data sets can be used. One is the widely-followed headline FX reserves, which fell US$34bn, after adjusting for our estimate of the currency valuation effect (but before adjusting for the portfolio effect due to the large global bond selloff in Nov). But valuation effects are highly uncertain and our estimates on those can be noisy, hence we rely on another dataset called “PBOC’s FX position” (which shows the amount of PBOC’s FX assets at book value, out on Dec 14) as a cross-check on PBOC’s FX sales net of valuation effects.  

According to that, PBOC sold US$56bn in FX in November. Since June, this data has continued to suggest significantly larger FX sales by the PBOC than is implied by FX reserve data (the gap is about $25bn/month on average in the last several months). Besides through the spot position, the PBOC might also change its FX position through forwards--the PBOC’s officially reported forward book for Nov will be released on Dec 30.

Cumulatively from August 2015 through November, FX outflow according to our measure totaled roughly US$1100bn, while implied FX sales suggested by PBOC’s FX position (headline reserves after adjusted for currency valuation effect) were approximately US$630bn (US$540bn). The share of PBOC sales in our measure of total FX outflow (including sales by PBOC and other Chinese financial institutions) has risen to about 75% on average since July from about 50% in the first half of the year.