Is China Counting Yuan As Forex?
Thursday, the People’s Bank of China, the central bank, released data showing that China’s foreign exchange reserves increased $10.26 billion in March.
A Bloomberg survey had pointed to a $6.3 billion drop. A Reuters poll was even more downbeat. It estimated a decline of $20.0 billion.
China, for more than a half year, has reported reserves higher than expert forecasts. In fact, the report for the last month the PBOC claimed an increase in reserves—October of last year—was particularly surprising. In view of the reported capital outflow that month, it is not clear how Beijing managed to accumulate reserves during the period.
The March increase in reserves, the Wall Street Journalnoted, is “a sign Beijing may have partially succeeded in stemming heavy capital outflows.” Yes, but there are also indications that Beijing is now including assets denominated in renminbi in its foreign exchange reserves.
As an initial matter, the State Administration of Foreign Exchange, the central bank unit managing the foreign reserves, has apparently been including CNH, renminbi outside China’s currency borders, in the reserves as the Financial Times has reported.
Moreover, the South China Morning Post posted an article on Friday suggesting Beijing was including other renminbi-denominated assets. That paper reported that Wutongshu Investment Platform Co., wholly owned by SAFE, bought state bank shares, triggering a rally in China’s domestic stock markets. There is evidence of increased “National Team” buying last month, and Wutongshu’s purchases were presumably part of this effort to lift sagging indexes.
In any event, Wutongshu, formed in November 2014, is now a major holder in several commercial banks including Industrial and Commercial Bank of China, Bank of China, Bank of Communications, and Shanghai Pudong Development Bank.
There are various theories how Wutongshu acquired the shares in violation of a central bank rule prohibiting SAFE from making local-currency investments in China. First, Chen Li of Credit Suisse believes the holding company may have simply received the shares. He notes that China Securities Finance Corporation borrowed 1.2 trillion yuan from the PBOC to buy stock as a part of the central government’s market-support efforts. CSFC, however, couldn’t repay, so it may have surrendered the shares, which had fallen 15% to 25%, to the central bank in satisfaction of its obligation. Li thinks the PBOC transferred the shares to SAFE, which contributed them to Wutongshu.
