Goldman Sachs – China: FX reserves fell US$99bn in January to US$3.23tn

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Goldman Sachs ResearchBottom line:

The PBOC’s FX reserves decreased US$99bn to US$3.23tn in January (Bloomberg
consensus: -$118bn; December: -$108bn). After adjusting for estimated currency
valuation effects, the fall in reserves may have been about US$89bn (vs. estimated -$130bn in December).
As has been the case in the last few months, additional SAFE and PBOC data, likely
to be released in the next two weeks, should give useful supplemental information
regarding the underlying flow situation.

Main points:
The People’s Bank of China (PBOC) reported that its foreign exchange reserves fell
by US$99bn in January (vs. a US$108bn decrease in December), to US$3.23tn at the
end of the month. We estimate that currency valuation effects could amount to
around -US$10bn (assuming the currency composition of China’s FX reserves is
similar to that of the global average), and therefore sales of FX reserves might have
been about US$89bn in January (vs. estimated $130bn in December). The continued
rapid loss in FX reserves suggests that FX outflow remained at a rapid pace.
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 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 (spot) 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 February 23. Data on
the positions of FX purchases by the banking system should also shed useful additional light, and are likely to be released around middle of the month (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,