Jake's View

China’s forex reserves rising? Dig deeper, and here’s what you see

PUBLISHED : Monday, 09 May, 2016, 5:56pm
UPDATED : Monday, 30 May, 2016, 5:11pm

China’s foreign exchange reserves rose, albeit marginally, for a second straight month in April, indicating easing in capital outflows, according to data released by the People’s Bank of China yesterday.

SCMP, May 8

I wish sometimes that the boss had not told me years ago to limit my use of charts in this column to a maximum of two per day.

He knew quite well that there would otherwise be days in which I would fill all the space allotted to me with charts carrying only a few text inscriptions along the lines of “Wow, look at this!” or “Going for the high dive here!”

He was right. It is exactly what I would have done and today is one of the days in which I would have done it.

But newspapers, alas, are more about words than about pictures and as the two-chart stricture on me has not yet been relaxed (come on, boss, please), I shall have to describe what I see in words.

China’s forex reserves rise for second month in a row in April to US$3.22 trillion

We shall start, nonetheless, with a picture setting out the straight facts on the US dollar market value of China’s foreign reserves. It confirms that they have indeed risen by US$17 billion over the last two months after having plummeted by US$791 billion since mid-2014. It’s not much but it’s a start, say the optimists.

And here come my quibbles. First, more than half of that tiny increase is made up by revaluation of gold reserves. There has been no change in the size of the country’s physical gold reserves but the price of gold has gone up sharply since mid-December and the reserve numbers have been adjusted up for it.

Next, we get the almighty US dollar, which hasn’t been quite so almighty this year. On its trade weighted index for major trading partners it has declined by about 7 per cent since the end of last year.

This makes a difference to China’s foreign reserves because they are stated in US dollar terms although they have been diversified in recent years to incorporate investment in other currencies. If the US dollar is down against these currencies, then investments in these currencies are up in US dollar terms.

I cannot give you the exact numbers for this valuation effect as they are not published but I can tell you that the central bank’s statement of its foreign exchange holdings in yuan terms does not show an upward bounce so far this year. The decline continues in the central bank’s books.

A trillion-dollar question on China’s forex dilemma: just how low should its reserves go?

And then, most important of all, bear in mind that all the money made through an enormous current account surplus is moving right back out of the country again as capital outflow. The foreign reserve figures do not show you this. They only show you the net effect at the end of the day.

Thus here comes my second chart. Take all private capital movements, including errors and omissions in the balance of payments, as these are generally regarded as capital flows, and what you see is a net capital outflow running at a record US$680 billion a year.

Thus let’s not indulge ourselves in too many words of comfort just yet. Capital flight is still a very big feature of China’s economy.