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China's Reserves Continue To Decline As Capital Outflows Accelerate, "Outbound Travel Spending" Surges

The confusion over the direction of Chinese capital flows continues to grow.

On one hand, overnight the PBOC reported that China’s foreign-exchange reserves "posted a sixth straight monthly increase" as the yuan strengthened and economic growth remained robust, Bloomberg reported. Specifically, Beijing said that China's foreign currency stockpile rose $23.9 billion to $3.081 trillion in July, higher than the $3.075 trillion estimate. The narrative was ready to go: as Bloomberg stated, "solid economic data and the presence of curbs on moving money abroad have helped restore confidence in the currency and ease outflow pressure. The foundation for steadier cross-border capital flows has become more solid, the State Administration of Foreign Exchange said last month."

Economist responses were quick to praise this ongoing shift in the recent outflow regime:

  • "Capital outflows have eased markedly since the start of the year and are now mostly offset by the trade surplus," said Julian Evans-Pritchard, a China economist at Capital Economics Ltd. in Singapore. "This shift should prove supportive of the renminbi, which we think will strengthen against the U.S. dollar during the next couple of years."
  • "Depreciation expectations in the market have definitely abated, and outflow pressure has eased," said Zhu Qibing, chief macro-economy analyst at BOC International China Ltd. in Beijing. He expects reserves to hover around the current level for the rest of the year.
  • "This is enough to change market expectations from yuan depreciation to appreciation," said Iris Pang, an analyst at ING Groep NV in Hong Kong. "The pressure on capital outflows has eased a lot, but I don’t think regulators will relax curbs."
  • "Today’s data on FX reserves perfectly fits the latest change of mood regarding the Chinese currency," Frederik Kunze, chief China economist at German lender NordLB in Hanover, said in an email. "Fears with respect to a pronounced depreciation of the RMB against the USD have receded substantially. Attention will likely start to focus on more liberalization measures."

On the other hand, there was just one problem with the above assessments of China's inflows: they are all completely incorrect.

While those, such as the "experts" listed above may be left with the impression that China has managed to put a lid on its relentless capital outflow pressure, using a separate gauge compiled by China's SAFE which tracks onshore FX settlement as well as cross-border RMB flows, shows something vastly different: as calculated by Goldman, China has not had a single month of FX inflows since its mid-2015 Yuan devaluation as shown in the chart below.

And while we have yet to get the July SAFE data, even a simple assessment of the latest release shows that outflows continued for yet another month. As Goldman calculates this morning, while the PBOC’s FX reserves "increased" by US$24bn in July to US$3.081tn, after adjusting for currency valuation effects, reported reserves actually decreased by US$10bn, to wit:

We estimate currency valuation effects at about +US$34bn in July. Excluding such estimated effects, reported FX reserves would have fallen US$10bn (vs. –US$8bn in June). However, because of various technical factors (including noisy valuation effect estimates), we have been instead relying on other PBOC and SAFE data (listed below) for a better sense of the underlying flow picture.

As usual, watch for subsequently released PBOC and SAFE flow data to confirm that Beijing has been fibbing just a little about the underlying FX flow, which at least on the surface suggest 6 months of inflows when in reality it is merely tracking the weakness in the dollar.

There's more: as Goldman notes, monthly outbound travel spending by Chinese residents jumped 47% yoy (to US$29bn) in June. SAFE has subsequently brought forward the implementation of required reporting of large-sized bank card transactions overseas (from Sep 1 to Aug 21).

Exhibit 1: Outbound travel spending surged in June:

Some more commentary on this curious development:

Service trade data released last week shows a significant jump in Chinese residents’ outbound travel spending in June (Exhibit 1), which increased 47% yoy (or about US$9bn in sequential seasonally adjusted terms). Note that SAFE first announced in early June that it would tighten the reporting requirement on bank cards’ overseas usage (banks will need to report any card transactions overseas that involve more than RMB 1,000, or about US$150), with implementation on Sep 1. The subsequent rise in outbound travel spending might partly reflect attempts to front-run the rule implementation (especially as some of the outbound travel spending could be disguised capital outflow). But in SAFE's most recent communication late last week regarding the new reporting requirement, the implementation date has now been brought forward, to Aug 21. Overall, the authorities have remained vigilant in using various macro-prudential measures to discourage undesired outflows, which should continue to mitigate the near-term need for the authorities to sell FX to support the currency

As a reminder, to get confirmation of the ongoing outflows, on August 16 SAFE will release additional data which will detail: i) PBOC FX position (spot; net of valuation effects): around mid-Aug; ii) Goldman's preferred measure of underlying FX flow (based on SAFE data on FX settlement onshore and cross-border RMB flow): Aug 16; and iii) PBOC's reported forward position: end-Aug.