Brief Thoughts on PBOC $94 billion FX Depletion
There are a couple of points that need to be emphasized. First, $94 billion is definitely a little better than expected but at the same time nothing to rejoice about. $94 billion is still $94 billion which even by Chinese standards and relative reserve standards, is big money. Second, declaring a $94 billion drop in FX reserves a good month is like saying “it’s merely a flesh wound.” Enough of those flesh wounds can be mortal. $94 billion is still an enormous amount of defense by the PBOC. Third, the evidence indicates not that the market is settling back down but rather that the market is betting more and more against the RMB stabilizing. Capital appears to be flowing out at a faster rate with Capital Economics estimating August outflows at $130 billion up from $75 billion in July. As I have noted, this number has been regularly increasing for a while now and shows no signs of slowing down. This is placing downward pressure on the RMB so much that China is tightening capital controls. What is amazing is that some people the possibility of Beijing implementing further capital controls as evidence of their control of the situation. Beijing implementing stronger capital controls will demonstrate nothing more than a complete loss of control of the financial situation and investor confidence. Furthermore, the offshore rate is widening its divergence with the onshore rate to now about 1.5%. This is not indicative of a currency that is stabilizing or a central bank that is gaining investor confidence. Fourth, China doesn’t have years of FX reserves. Even at the rate of $100 billion a month, using the IMF baseline, it would have 9 months of FX reserve depletion. Assuming it went further, it would have 18-24 months. China does not have the cushion many people assume. Fifth, due to the tightening from RMB purchases, Beijing has been recycling this liquidity into the domestic system via reverse repos and related methods to the tune of approximately $180b. Do the math: let’s say $100-120b was taken out via FX sales but $180 injected. That means Beijing is providing $60 billion net liquidity to domestic financial institutions. Banks are much tighter on liquidity than understood. Sixth, pretty sure I was referred to as a “doom monger” today. I’ve always wanted a cool nickname.