Chinese Reserves Could Tumble 10% In A Single Month

As expected here, most analysts were too conservative in their estimates of yuan defense costs. If the latest estimate from DB is in the ballpark, Chinese reserves could be under $3 trillion by the end of November assuming no trend change.

How much has China spent defending the RMB since Aug. 11? Deutsche reckons $100-150bn (out of $3.6tn of reserves) pic.twitter.com/8QYJyqSLSq

— Tracy Alloway (@tracyalloway) September 4, 2015

Deutsche Bank's estimate works out to a $150 to $225 billion monthly rate. On top of that, there's the average $26 billion in reserve outflows since the peak of reserves in June 2014. At the low end of DB estimates, the "extreme" forecast of $3 trillion in reserves by year end 2015 is easily hit. At the high end, reserves would fall below $3 trillion in October.

Now imagine there is a panic and China has to really spend to defend the yuan. In the post China May Only Have Enough Cash for 6 to 18 Month Defense of the Yuan, I looked at an estimate of China's liquid reserves. Charlene Chu thinks they have far less liquid capital available than believed, less than $1 trillion by her estimate. Based on current DB estimates, China might exhaust those liquid assets by October.

Official reserve numbers will be out soon enough, so I don't want to over speculate on DB estimates. That said, if the high end estimates are plausible, a bad month for China could easily see outflows on the order of $300 billion, a 10% draw down in reserves. Those are the types of numbers that I think most people would view as impossible. Yet only a month ago, they would have told you a depreciation in the yuan was impossible.

Gordon Chang: 2015: The Year China Goes Broke?