China Gauging exporters’ “USD hoarding” FX reserves rose $3...-110239556

Asia Pacific Economic Research08 September 2024J P M O R G A Nwww.jpmorganmarkets.comEmerging Markets Asia, Economic and Policy ResearchTingting Ge(852) 2800-0143tingting.ge@jpmorgan.comHaibin Zhu(852) 2800-7039haibin.zhu@jpmorgan.comGrace Ng(852) 2800-7002grace.h.ng@jpmorgan.comJi Yan(852) 2800-7673ji.yan@jpmorgan.comJPMorgan Chase Bank, N.A., Hong Kong BranchChina’s August FX reserves rose US$31.8bn to $3,288.2bn, in line with our expectation. It follows the $34.0bn increase in July. Gold reserves remained unchanged, after solid increases in the previous 18 consecutive months through April. The official August trade data is not released yet. Our baseline forecast looks for exports to gain a modest 1.6%m/m sa after July’s 4% drop, along with a 1.5% rise in imports. It leaves trade surplus elevated at US$81bn and we assume current account surplus to narrow modestly to US$33.0bn. Meanwhile, the US dollar index eased further from 104.1 to 101.7 in August, leading to an estimated currency valuation gain of US$31.1bn. Taken together, we tentatively estimate a US$32.3bn implied capital outflow in August (vs -US$29.7bn in July). Rapid CNY appreciation fuels market concern of exporters’ USD selling. After the drastic unwinding of carry trade involving some low-yield funding currencies (eg. JPY, CNY etc.), the long-lasting gap between official CNY fixing and market spot price has been largely closed since early August. It happened against the backdrop of market repricing of Fed outlook and a hawkish move from the BOJ, which contributed to the drastic position squeeze and unwinding of bearish JPY and CNY short trades. In August, CNY/USD moved lower from 7.25 to 7.09, with CNY appreciation of 2.1%. There have been rising market concerns of further CNY strength with additional short covering and exporters’ USD selling. In late August, Bloomberg reported that Stephen Jen estimated Chinese firms may have amassed more than $2 trillion since the pandemic in offshore investments, and may sell $1 trillion when Fed starts rate cut, which could strengthen CNY by 10%. This has added fuel to market discussions around the scale of Chinese exporters’ USD hoarding and pressure on further CNY strength. In the backdrop of CNY weakness since early 2023, banks’ net FX settlement ratio has stayed largely negative. Corporates increased their FX purchase (mostly USD) along with low FX conversion, as the ratio of banks’ FX sales on behalf of clients continued to rise, along with a muted FX settlement ratio. Net FX settlement ratio stayed elevated at -14.2%pts in July. It paints a similar picture if we also cover services and capital accounts in the analysis. Excluding executed forward trading, banks’ FX sales ratio spiked to 69.7%, the highest since 2015-2016, while FX settlement ratio stayed subdued at 53.7% despite the 2.5%pts uptick in July. 6.06.26.46.66.87.07.27.4-40-30-20-100102030101112131415161718192021222324Net FX settlementUSD/CNY (RHS)Banks' net FX settlement vs. CNY