DeDollarization's Flipside: Chinese FX Reserves Depreciate

SCMP: China’s foreign exchange reserves dip on US dollar rebound
Reserves fell US$17.97 billion in April to US$3.125 trillion – the lowest since November, compared with a rise of US$8.34 billion in March, central bank data showed on Monday.
The subheader of the article: "But Beijing seems less concerned about capital flight – in sharp contrast to a year ago"

We can see why by looking at FX reserves in SDR, which rose from $2.166 trillion to $2.173 trillion. The decline was driven more by revaluation than outflows. China won't have to worry about outflows until the U.S. dollar rally revives fears of a significant depreciation. For now, many believe the rally is a counter-trend rebound and not a larger move higher.

The situation can change quickly. As I wrote last month in Countdown to Yuan Devaluation, I expect all of the reserve accumulation from the January 2017 low to January 2018 high will be exceeded by a single month of outflows in the coming depreciation wave. The greenback's modest move in April took Chinese reserves back to November 2017 levels (there was a larger dip in February and March's rebound was small). Revaluation alone will take Chinese reserves to near $3 trillion if DXY makes in back to 100. The prior wave of reserve depletion lasted 30 months and averaged $32 billion a month. DXY peaked at 102.

I can envision substantial reserve depletion amid a dollar rally, and that's even before factoring in rising oil prices and a potential renegotiation of the trade balance with the United States.

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