According to official PBOC data released two weeks ago, the Chinese foreign exchange stockpile rose by $24 billion in May, the fourth consecutive month of increases, taking it to $3.056 the highest level this year, easing concerns about ongoing capital flight and preventing a self-fulfilling prophecy of capital outflows prompting more capital outflows. There is just one problem: China appears to have lied again.
Based on a separate gauge released overnight, which tracks onshore FX settlement as well as cross-border RMB flows, what happened in May was the opposite of what the PBOC reported as net renminbi outflows accelerated to $21 billion, up from $13 billion in April, and the highest monthly capital flight in 5 months. And, as Goldman writes, "the persistence of FX outflows might have contributed to the recent shift in the authorities’ CNY management strategy" and will certainly explain last month's unexpected second revision to the Yuan fixing mechanism.
What is just as concerning, according to the revised FX flow calculation methodology, China has not had a single month of FX inflows since its mid-2015 Yuan devaluation as shown in the chart below.
We focus on two separate sets of SAFE data to gauge the underlying FX flow situation:
- According to the SAFE dataset on “onshore FX settlement”, net FX demand by non-banks onshore in May remained low at US$4.0bn (vs. US$2.8n in Apr). This is composed of net outflow of US$7.4bn via net outright spot transactions and net inflow of US$3.4bn via net freshly-entered forward transactions.
- Another SAFE dataset on “cross-border RMB flows” shows that net flow of RMB from onshore to offshore rose to US$17.1bn in May (vs. US$10.0bn in Apr). The PBOC reportedly relaxed to some degree the restrictions on outbound RMB flow in mid-April. This might have contributed to the increase in RMB outflow.
Our preferred gauge of underlying flow therefore suggests a total net FX outflow of US$21bn in May (US$4.0bn from net FX demand onshore plus US$17.1bn in FX outflow routed through the CNH market). Exhibit 1 shows our FX flow measure.
While the underlying flow picture has remained much better than last year, the persistence of net FX outflow (even as USD/CNY was broadly stable) might have been one reason for the recent shift in the authorities’ CNY management strategy. In particular, the abrupt step-appreciation in the CNY two weeks ago might be partly intended to stem any entrenched speculative outflow pressures. Also, the introduction of the counter-cyclical factor in the CNY fixing mechanism could potentially allow the authorities to increase their CNY support through “signaling” rather than only through actual FX sales.
Exhibit 1: Our measure of FX outflows rose moderately to US$21bn in May
If Goldman's take is accurate, and in the past this calculation has proven to be far more accurate than the official monthly reserve data from the PBOC, it has implications for not only the future value of the Chinese currency - considered by many China's fulcrum security - which is now artificially stronger due to "fake data", but also for the Chinese economy, because if Beijing is resorting to outright misreporting on an dataset that can be easily double-checked, it would suggest that the turmoil inside China's financial system is far greater than what is officially reported. The good news is that for now at least, the discrepancy between the official data and the calculated outflow remains relatively subdued.
Goldman's take would certainly explain the relentless bid for bitcoin, which this morning has rebounded over 20% from yesterday's "crash" lows.
Finally, if Chinese reserves are still being drained, then the recent Bloomberg "trial balloon" that China is "ready to buy more Treasuries as the Yuan stabilizes" was merely an attempt by Beijing to get a better price into which to sell US TSYs as it seeks to offset the capital flight.