HALISTER1: China’s FX Reserves Way Lower Than Others Expect: Top Forecaster

China’s FX Reserves Way Lower Than Others Expect: Top Forecaster

(Bloomberg) -- Reserves likely dropped $100b in October, more than five times than median estimate, as China dug deeper into its foreign-exchange stash to cushion a decline in the yuan, according to Capital Economics.
  • PBOC may have sold about $35b of its reserves last month, while weakness in euro and U.S. Treasuries contributed to $65b valuation loss, says China economist Julian Evans- Pritchard
    • He estimates 10% of China’s currency reserves are in euro and ~65% in Treasuries
    • Foreign reserves data due on Nov. 7
    • Capital Economics is top forecaster on China reserves, based on data compiled by Bloomberg
  • Should Capital Economics be right, the drop would be the largest this year, more than five times the loss in September and similar to $99b drop in January when CNH-CNY spread widened more than 1,000 pips as offshore yuan fell sharply
    • Would signal heavy depreciation pressure. Without PBOC defense, currency would be much weaker: Evans-Pritchard
    • Median est. in Bloomberg survey is for drop of $18b; ests. of 14 economists range from declines of $6b to $82b. Survey doesn’t include Evans-Pritchard’s forecast
  • Yuan hit a 6-year low vs the dollar on Oct. 28 and fell 1.5% during the month; CFETS RMB Index rose 0.1% from 94.07 on Sept. 30 to 94.15 on Oct. 28
    • EUR/USD slid 2.3% last month, biggest drop since May
    • 10-year Treasury yield rose 23bps, most since June 2015
    • All G-10 currencies fell vs dollar, including yen -3.3% and GBP -5.6%
  • Commerzbank senior economist Zhou Hao says a rise in yuan trading volume in October could reflect more PBOC intervention
    • NOTE: USD/CNY avg daily trading volume was $27.8b in October vs avg of $21b in first nine months
  • ANZ’s head of Asia research, Khoon Goh, says conservative assumption would be PBOC accounting for 8% of FX trading activity in October, suggesting intervention would have reduced reserves by ~$35b
    • Further decline likely if USD strengthens following U.S. election as China will try to maintain stability in RMB index
  • Reserves should drop through next 12 months as PBOC continues to drain funds to prevent sharp slide in yuan amid persistent outflows and strong dollar, BBVA chief Asia economist Le Xia says
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Hao Zhou (Commerzbank AG)
Julian Evans-Pritchard (Capital Economics Asia Pte Ltd)
Khoon Goh (Australia & New Zealand Banking Group Ltd)
Le Xia (Banco Bilbao Vizcaya Argentaria SA)

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