China FX reserves a touch above expectation Two-sided risks...-110660083

Asia Pacific Economic Research07 October 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.comJPMorgan Chase Bank, N.A., Hong Kong BranchChina’s FX reserves rose US$28.2bn to $3,316.4bn in September, a touch higher than our expectation (J.P. Morgan forecast: $3,313bn, market consensus: $3,308bn). It follows the $31.8bn increase in August. Gold reserves continued to stay unchanged, after solid increases in the previous 18 consecutive months through April. The official September trade data is not released yet. Our baseline forecast looks for exports to fall a modest 0.9%m/m sa after the strong-than-expected rise of 3.9% in August, along with a 0.4% marginal easing in imports. It leaves the trade surplus to narrow modestly to US$86.5bn (vs. $91.0bn in August), and we assume the current account surplus to print at US$46.5bn. Meanwhile, the US dollar index eased further from 101.7 to 100.8 in September, leading to an estimated currency valuation gain of US$12.9bn. Taken together, we tentatively estimate a US$31.3bn implied capital outflow in September (vs. -US$58.2bn in August). Step-up in late September policy support triggered recent equity market rally and fueled market optimism around fiscal stimulus, a tailwind for CNY. The easing measures announced in late September drove a remarkable stock market rally, encouraged by the unprecedented central bank support for the equity market, i.e., the innovative creation of swap and re-lending facilities to support stock purchase. While the regulator ceased the release of high-frequency Northbound Connect equity flows on daily basis, the largest weekly gains since 2008 for MXCN (16.9%) and CSI300 (15.7%) for the last week of September suggests skyrocketing net inflows (US$5.1bn to 87 US/HK listed ETFs based on our equity analysts’ estimates). Such crowded foreign inflows over a short period of time point to a tailwind for CNY strength. CNY/USD did strengthen from 7.05 to 7.01 during the week and CNH slipped to below 7. Fiscal policy was absent in the latest policy easing announcement but market expectation has been building (e.g. 3-5 trillion yuan or even 10-trillion fiscal package). Both the magnitude and direction of additional fiscal stimulus are closely watched, though we think the magnitude likely will not surprise on the upside (2 trillion yuan seems reasonable in our view) and the support for consumption may come in weaker than the Reuters’ news (1 trillion yuan). It remains unclear whether fiscal authorities are ready for a bazooka fiscal package or a dramatic policy re-direction, which we think will not happen immediately, but may happen gradually depending on changes in domestic and external economic conditions. Exporters’ USD selling picked up, but not as much as market feared and banks’ net FX settlement stayed nega