China's Reserves Tumble $94 Billion in ~20 Days; Actions Speak

Bloomberg: China's Currency Stash Drops by $94 Billion After Devaluation

China spent much less on defending the yuan than some estimates forecast, with a burn rate of $94 billion. Deutsche Bank was spot on at the low end of their range, having forecast $100 to $150 billion. Depreciation began on August 11, so I'd venture they conservatively going to burn $125 billion in a month as things stand today. To put this "good" number in perspective, only a couple of weeks ago, a forecast of year-end reserves at $3 trillion was the most pessimistic forecast among 28 forecasters and traders surveyed by Bloomberg. This pace of decline translates into a year-end yuan target of 6.8 to 7 yuan per USD.

I think they may spend much more in the coming months though, because The initial run on the yuan was a reaction. Speculating on yuan depreciation was an obscure minority position up until about a month or two before it happened, when it grew to become a slightly less obscure position. The numbers aren't in China's favor, depending on how you estimate China's reserves or China's willingness to burn through reserves. Currency markets have a lot more firepower than even the PBoC and something that isn't really being discussed yet (I haven't come across much discussion at least) is the informational power of the offshore yuan. I keep harping on this idea because it is really central to understanding the threat to the yuan. The offshore yuan is a market price and everyone inside and outside of China knows it. The offshore yuan isn't yet a major reference point, but if currency risk rises on the list of Chinese investors' concerns, they will start watching the offshore yuan and react by either obtaining U.S. dollars or alternative assets such as gold. They may try to buy overseas assets, but the "going out" strategy is on hold. Bloomberg: China Freezes Outbound Investment Quotas as Outflows Hurt Yuan
The State Administration of Foreign Exchange, which has approved 132 local institutions to put as much as $89.99 billion in offshore assets via its Qualified Domestic Institutional Investor program, hasn’t granted new allocations since March. Quotas for overseas investors to access domestic capital markets rose $16.4 billion to $140.3 billion in the period, data from the regulator show.
Since equities are probably headed lower in the event of further yuan depreciation, investors may not want to hold foreign equities, but an ETF such as the Nasdaq 100 ETF (513100) might develop a premium if significant currency depreciation is expected and investors have limited options due to stricter currency controls.

The FT editoralizes: FT: Beijing faces up to its monetary trilemma
The first recourse for governments facing a currency crisis is to hope that it goes away. It is possible that it might: China has other ways to stimulate its economy that would enable it to sustain the tight monetary stance needed to keep the currency strong. The PBoC still has more than $3.5trn of reserves, enough to absorb more than two years’ capital flight at the current rate. Some will be tempted to see the volatility of the past month as just a passing summer storm, proof of the markets’ irrationality, and likely to evaporate if confronted with sufficient determination.

But however unpalatable the other horns of the trilemma, historical precedent suggests that waiting out a crisis can be the riskiest course of all.
I still expect a large, one-off devaluation that will surprise the market and completely end depreciation pressure.

In sum, China's reserve depletion wasn't as high as expected, but a month ago, this would have been a very negative result. Expectations have shifted. We have yet to see a major convulsion in the yuan, although there has been a lot of carnage in emerging market currencies. August is closer to the new normal than the peak of depreciation expectations.


  1. I am not sure why we should trust the Chinese reserve figures - they are unverifiable and surely easily cooked. The ways in which the PBoC could use accounting tricks to report a less severe figure are manifold.

    Seems that their reserve amounts should be considered with a healthy dose of skepticism.

    - Luke

    1. We can trust that they own the treasuries thanks to direct registration with the U.S. treasury. If anything I'd guess the reserve assets might be higher due to still not fully admitting their gold holdings. That said, Charlene Chu's estimate of liquid reserves calls into question how much of those assets can be deployed to defend the yuan, there's quite a wide range from here lowball estimate to some higher ones. The market can now test the PBoC to find out the truth, and I suspect they will try.