China Resorts To “Old School” Tactics To Support Inflows
Submitted by Gordon Johnson of Axiom
Is the PBoC “Tweaking” the FX Reserve Data to Improperly Show Foreign Inflows?
Over the past 30 months when the PBoC sold/brought dollars (evidenced by a m/m decline in PBoC funds outstanding for FX), 66.7% of the time reported FX reserves fell/rose.
Yet, in each of the past three months this year when data is available (Jan./Feb./Mar.), this trend has not held up. In fact, in Feb., despite the PBoC selling $6.26bn worth of dollars, which implies FX reserves should have fallen by a similar amount, reported FX reserves by the PBoC actually gained $6.92bn; and in Mar., despite $15.85bn in dollars sold, the PBoC reported FX reserves gained $3.97bn (thus, painting a “rosy” picture of foreign capital flowing into the country).
So how is this possible?
Well, the likely explanation centers on the PBoC likely rolling (i.e., selling) a number of dated long-term US treasury bills that were comfortably in the money, allowing for profits which were subsequently used to “pad” the FX reserve balance figure.
Why would the PBoC do this? In short, it makes it look as if money is actually flowing back into China, potentially encouraging those thinking of offshoring capital to keep the money inside China.