In all the drama surrounding the French elections, few noticed the PBOC’s announcement that China’s FX reserves rose for the third straight month in April, increasing by $20.45 billion to $3.03 trillion, more than the $11 billion expected and the single biggest monthly increase in three years going back to April 2014, on the back of a weaker dollar and increasingly more draconian capital controls on outflows.
Cited by the WSJ, some economists attributed April’s increase to a dollar that continued to decline in the past month especially after Trump said the U.S. currency “is getting too strong.” The value of other currencies in China’s reserve basket, including the euro, the British pound and Japan’s yen, similarly played a significant role in the rise, said Yan Ling, an economist with China Merchants Securities.
Besides USD softness (USD has weakened against the CFETS basket by over 2% year-to-date through April) and perhaps stronger RMB sentiment, the capital flow management measures introduced over the last several months have also contributed to the slowdown in outflows, Goldman speculated in a Sunday note. That could reverse, as there may be incremental relaxation of the capital account as the flow situation has improved and an overly tight capital account could hinder legitimate international trade and the authorities’ long-term RMB internationalization goals.
CNY mid rate for the day, little bit weaker for the yuan
Open market operations (OMOs):
inject 10bn yuan via 7-day reverse repos
inject 10bn yuan via 14-day reverse repos
Small injections (which mean today is a net drain); watch for more stress in HK yuan borrowing markets today. Yesterday saw surging rates for overnight (and longer) yuan borrowing. Likely we’ll see the same again today.
By limiting injections into money markets the People’s Bank of China makes borrowing yuan more expensive and therefore shorting yuan more expensive. The PBOC is trying to discourage yuan shorts.
Two months ago, when looking at an alternative measure of Chinese capital outflows using SAFE data, Goldman found that contrary to official PBOC reserve data, “China’s Capital Outflows Are Soaring Again”, having hit $78 billion in September.
Over the weekend, and following the latest PBOC data which revealed an outflow of $56 billion in November (which was only $34 billion when FX adjusted), Goldman repeated its FX flow calculation using SAFE data, and found the China continues to mask the full extent of its outflows, which in November spiked to $69 billion, and that “since June, this data has continued to suggest significantly larger FX sales by the PBOC than is implied by FX reserve data”, once again suggesting that China is eager to mask the true extent of reserve outflows, perhaps in an attempt to not precipitate the feedback loop of even further panicked selling of Yuan and even more outflows, and thus, even more reserve depletion.
According to Goldman’s MK Tang, money has been leaving in yuan payments for 14 consecutive months, while the central bank’s yuan positions have slumped the most since January. The situation could get worse, said Banny Lam, head of research at CEB International Investment Ltd, cited by Bloomberg.
More USD strength overnight = a higher USD/CNY mid rate setting again today.
11th day in a row of a lower CNY against the big dollar
injects 125bn yuan via 7-day reverse repos
injects 120bn yuan via 14-day reverse repos
and injects 25bn yuan through 28-dayers
The Wall Street Journal had a piece up overnight (my overnight, K?)
Officials and analysts say the Chinese government is increasing tolerance of a cheaper yuan
The fast depreciation lately underscores bigger concerns among Chinese policy makers and economists about the country’s economic situation … officials and analysts say a weaker yuan would be the price of using easy money to prop up growth and to prevent a precipitous drop in housing prices
The result could be a yuan feedback loop driven primarily by internal forces
The rapid run-up in property prices in many cities, for instance, is sending more Chinese looking to foreign markets to park their money, potentially exacerbating capital outflows that would further drive down the yuan
Hong Kong’s daily benchmark for offshore interbank renminbi loans has ticked higher, pushing the cost of lending back above the elevation hit by a sudden spike on Thursday.
The overnight CNH-Hong Kong Interbank Offer Rate (Hibor) came in at 5.5155 per cent on Monday, up by 80.28 basis points from Friday’s level and exceeding that seen on Thursday, when the rate jumped 3.88 percentage points from a reading of 1.57 per cent.
The interbank rate in Hong Kong is far less important than Libor, the US-dollar counterpart set in London every day that acts as a crucial lending benchmark.
But a spike in Hibor would track with a scenario in which the People’s Bank of China intervened in the CNH market itself or had mainland banks sop up liquidity on its behalf to prevent greater pressure on the Rmb to devalue – possibly to keep it from passing the Rmb6.7 mark against the dollar ahead of special drawing rights (SDR) operations set to begin on October 1.
That’s one possibility mooted by Societe Generale analyst Jason Daw in a note today, the other being that swaps/forwards used in intervention last August following major devaluation prompted by a new fixing scheme for the currency’s trading band aren’t being rolled over, sucking CNH liquidity out of the market – though allowing those to expire would still be the PBoC’s call to make.
If the latter is the case, he says, “front-end points could become more volatile over the next year as previous intervention flows mature.”