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Whose FX Reserves Suffered The Most During The "China Tantrum"? Goldman Has The Answer

In the four or so weeks after the August 11 China deval, all anyone wanted to talk about was FX reserves. 

What most didn’t immediately realize was that China’s new FX regime would, in the short-term anyway, end up leaving less of a role for the market in determining the yuan’s exchange rate not more. This is because - and we’re fond of quoting BNP’s Mole Hau on this - “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix.” Because the market ultimately expects a much larger devaluation, the persistent pressure on the yuan caused the PBoC to have to intervene in the onshore and eventually, the offshore spot markets. That meant liquidating reserves. The sheer pace of the drawdown caught the world’s attention as suddenly, everyone woke up to what we began discussing last November when it became clear that the Saudi’s move to kill the petrodollar would lead directly to reserve liquidation across EM as commodity currencies and exporters were set to suffer from crude’s collapse. 

Of course the yuan deval was especially bad news for emerging Asia where economies that were already suffering from slowing Chinese demand and slumping commodities were suddenly forced to grapple with a loss of export competitiveness as well. 

Before you knew it, it was an all-out Eastern USD reserve liquidation party, leading some to ask what effect the drawdowns would ultimately have on UST yields because all else equal, FX reserve selling is just QE in reverse. As we noted on any number of occasions, this could have the effect of amplifying what would otherwise be a merely “symbolic” 25 bps Fed hike. That is, if the Fed hikes and triggers more EM outflows, well then they’ll be more USD paper selling (i.e. a loss of global liquidity) as FX managers move to support their currencies. 

Against this backdrop, we bring you the following from Goldman who has endeavored to tally up currency intervention as a percentage of reserve money in Asia during what they’re calling the “China tantrum”. Note the rather scary looking figure for Malaysia, where it's not just financial and economic conditions that threaten to tip the country into crisis, but a political scandal as well that has quickly mushroomed into a series of investigations across the globe that could ultimately cost PM Najib his career and legacy.

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From Goldman

When the mini-devaluation of the RMB surprised us and markets in early August, we argued strongly that this was a one-off adjustment that did not signal the beginning of a devaluation cycle. Markets disagreed and risk assets sold off hard in the weeks that followed. Asian FX was not spared amid the sell-off, with RMB proxies such as the MYR hit especially hard. There is always a challenge in reading price action in the moment, given that many Asian central banks use their official foreign exchange reserves to stabilize exchange rates. These actions are usually not known until months afterwards, when data on spot reserves and forward books become available. In this Global Markets Daily, we compile the full picture for Asian central bank intervention during what we are calling the 'China tantrum', the period from June to August when SHCOMP was already selling off. We compare the magnitude of reserve drawdowns to the 'taper tantrum', the period from June to August 2013.

Many Asian central banks intervene not just in spot foreign exchange markets, but also in forward markets. Typically, these transactions consist of a spot/forward foreign exchange swap that results in the central bank having a forward USD asset. This kind of intervention leaves the central bank balance sheet unaffected and thus amounts to sterilized intervention. Many Asian central banks rely heavily on this kind of intervention, so it is important to factor this into the overall intervention picture. We look at the FX-valuation-adjusted decline in spot reserves between end-May and end-August (using the COFER data to adjust for valuation effects) plus the change in forward books over this period. We scale this proxy for official intervention by reserve money at the end of May, which helps control for differences in size across countries. After all, a $1bn drop in reserves is a different story for China compared with Malaysia.

Relative to reserve money, foreign exchange intervention was most pronounced for Malaysia (43%), followed by Thailand (17%), Singapore (16%), South Korea (15%) and Indonesia (10%). Despite the seemingly large drop in China’s official reserves, this works out to be only 4% of reserve money, underscoring our view that developments there are more benign than meets the eye. Coupled with FX moves, these numbers paint a picture where depreciation pressure was most pronounced for Malaysia. With the exception of Malaysia, these reserve losses are comparable to 2013 when the 'taper tantrum' put depreciation pressure on currencies in the region.