Growing Money Supply and Rising Yuan Increases Outflow Pressure

From the view point of reserve coverage of money supply, the yuan floating around the financial system make outflows a greater risk in April. Even if outflows cease, the creation of new money is unbacked printing under the current monetary policy (which could be ended at any time by floating the currency). China needed to increase foreign exchange reserves by another 87 billion USD in March in order to maintain a stable ratio of M2 to FX reserves.

Looking at it from the perspective of reserve coverage of M2 at present exchange rates, the USDCNY would need to rise to 6.62, or 2%, to make up for the inflation.

These numbers do not matter for the exchange rate today, but if the market ever decides China is running out of the reserves, they could matter very rapidly. It is a potential depreciation point that continues to move in the direction of greater depreciation, and China already has less reserves backing M2 than the crisis countries in 1997.