Extremely Bad News From China: Forex Reserves Rise In June
People’s Bank of China , China’s central bank, stunned observers on Thursday when it announced that the country’s foreign exchange reserves rose in June by $13.4 billion.
The report might be a fib, but it surely is worse news if it is in fact true. If true, the unexpected increase suggests Beijing has gone back to its most controversial trade policy: forcing the renminbi lower to help exporters.
Just about everyone had expected reserves to fall last month because the currency is considered overvalued—Nomura says by about 6%—and Beijing has been consistently defending it.
The cost of the defense has been high. The PBOC, as the central bank is known, spent $473 billion to defend the renminbi between August of last year and this June, according to Financial Times calculations.
As a result, the country’s foreign exchange reserves tumbled during the period. At the end of last July, they stood at $3.65 trillion according to the central bank. At the end of June, they were $446.1 billion less.
And in reality, the fall was even greater as the central bank has been engaging in questionable transactions, like Brazilian-inspired tricks involving forward contracts, to make the reserves look higher than they are. Since October 2015, there has been approximately $500 billion of net forex outflow according to Goldman, well above the $330 billion suggested by official data from the State Administration of Foreign Exchange, the central bank unit serving as custodian of the nation’s foreign reserves.
Accordingly, China was engaged in the opposite of what Donald Trump and other critics alleged. While they charged Beijing was pushing the renminbi down, Chinese officials were actually keeping it higher.
Why was Beijing helping foreign exporters at the expense of its own? To stem potentially fatal capital flight. Bloombergestimates that net capital outflow last year amounted to $1 trillion.
This year, there is a general perception that outflows have declined. Goldman, for instance, estimates there was only $123 billion of net capital outflow in Q1. That number, less than half the average pace of last year, may be on the light side, but it’s hard to tell what is actually happening on that front.
In any event, the increase in reserves in June suggests Beijing is not especially worried about fleeing capital, or at least it is more worried about falling exports. In the first five months of this year, the country’s exports dropped 7.3% against the same period last year. This dismal performance, unfortunately for Beijing, is not an aberration. Exports were off 2.8% last year.
So why is the small June reserve increase so important? “The latest twist comes from the foreign reserves data, which suggest that China may have begun to intervene actively in the markets to drive down the yuan,” writes Ambrose Evans-Pritchard. “Provisional figures imply that the PBOC purchased a net $34 billion of foreign bonds in June, once valuation distortions are stripped out.”
As the Telegraph’s international business editor notes, any hint of China engaging in predatory trade practices “would have grave repercussions.” Beijing early this year promised to hold the currency “basically stable.” No one expects the yuan, as the currency is informally known, to keep up with a surging dollar, but they do expect the currency to move, as officials implied last December, in line with the China Foreign Exchange Trade System RMB Index, which is composed of 13 currencies of China’s trade partners.
