EC From China: Dollar, Deflation, And The RRRest

It’s not necessarily a discrepancy so much as maybe looking at the same thing from a different point of view. China’s State Administration of Foreign Exchange (SAFE) reports on, among other things, the widest definition of foreign assets being under its whole national umbrella. Yet, the agency publishes balances denominated not in CNY, either US$’s or SDR’s (hey, they can dream!) instead.

The country’s central bank, the People’s Bank of China (PROC), owns, holds, and manages (a comprehensive term of art) a big chunk of those reserves. In fact, contrary to what seems popular perception, these foreign assets (largely US$ denominated) form the basis of the Chinese domestic monetary system (RMB).

Because of this fact, China really, really needs dollars (see: below).

SAFE indicated that during the last half of 2020 a small few might have trickled in – alarmingly, though, in the same way and at close to the same suspiciously low rate as had been experienced in 2017. Since the end of last year, though, sideways; no more than December.

In reporting in US$ valuations, however, SAFE’s total is influenced to some degree by the market value of all those foreign instruments. As the media kept reminding everyone, there was that “historic” selloff in many if not the vast majority of those (foreign reserves are most often held in the form of foreign government debt like UST’s). Meaning, there still might have been a trickle of inflows into China that had been reinvested in UST’s and the like which then declined in value.

The PBOC, on the other hand, is openly trolling at this point (see: above). For several years, China’s central bank had clearly engineered (through various likely nefarious unknown perhaps unknowable means) a targeted range (and a very narrow one) for its foreign reserve balance sheet basis. Such absurdity was taken to ridiculous heights beginning in August 2019 (a very strong clue) and lasting all the way to the end of 2020.

For the month of February 2021, the PBOC said it had finally gained some inflows; the central bank reported the highest level of foreign reserves on its balance sheet since August 2018. Hurray, reflation! This anodyne description makes it sound consistent with the narrative as well as what was then running global bond markets during that month (though somewhat inconsistent with the behavior in CNY; another clue).

Technically true, though the rise in reported foreign assets was the equivalent of a rounding error and not really anything like actual reflationary inflows.

Not to be outdone, for the month of June 2021 yet another of the same. Following March, April, and May when foreign reserves didn’t move at all in either direction (again, the obviousness of targets/engineering), suddenly the PBOC reports the highest level of foreign reserves since January 2018. Another milestone comeback!

Once more, technically true yet almost surely purposefully empty. For anyone paying attention (which, Chinese authorities know, won’t be many), the question is why go through such a patently obvious charade?

The answer, I believe, was given to us this month, the one immediately following this latest chapter in the ongoing make-believe. Suddenly, July 2021, RRR cut.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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