China: FX reserves fell by USD18.0bn in April - Nomura

Analysts at Nomura note that China’s headline FX reserves fell by USD18.0bn in April to USD3124.9bn; however, after adjusting for FX valuation and coupon payment effects, FX reserves rose by USD2.1bn.

Key Quotes

“Broadly flat adjusted FX reserves in April represented a further improvement from the month-on-month declines in January (-USD26.9bn), February (-USD19.3bn) and March (-USD7.6bn). Overall, we believe the release reflects a continuation of the relatively benign net flow backdrop that has been in place since August 2017, especially considering the heightened financial market volatility since February 2018 and Sino-US trade tensions since March 2018.”

“Indeed, People’s Bank of China data show that foreign portfolio flows into China have been resilient; foreign investors maintained a rapid pace of RMB equity and bond purchases at USD32.4bn in Q1 2018 (USD38.4bn in Q4 2017). Timely April foreign bond holdings data from the China Central Depository & Clearing Co showed a substantial pick up to USD10.6bn of flows into Chinese interbank bonds from USD3.3bn in March, which is near the USD11.5bn high in September 2016, just before RMB was included in the IMF SDR basket on 1 October 2016.”

“We believe the strength and persistence of bond inflows has likely been driven by allocations into RMB bonds by real money investors and reserve managers, which were boosted by Bloomberg’s end-March 2018 announcement that it would add China RMB-denominated government and policy bank bonds to the Bloomberg Barclays Global Aggregate Index from April 2019

“Overall, we believe structural demand for RMB financial assets represents a medium-term impetus for currency appreciation, both on a trade-weighted basis and against USD (supported by our G10 FX strategy view of USD weakness through into 2019), as the internationalisation of RMB progresses. These foreign inflows should offset local demand for foreign assets, which we believe should remain under control, as long as China’s stable growth environment sustains through a well-managed financial deleveraging process.”

“In the near term, we see external risks stemming from trade protectionism, with the market focussed on the 15-22 May deadlines on the US Section 301 investigation, and a broad USD bid from higher US treasury yields and rising crude oil prices. Thus, we express our bullish RMB view through a long 1M CNY versus CFETS basket position.”