China's June Reserve Growth Was $11.9 Billion

The PBoC announced Monday morning that total reserves at the end of June reached $1.809 trillion (around 45-50% of annual GDP).  This breaks down to $153.9 billion growth in the first quarter of 2008 and a $126.6 billion growth in the second.  The PBoC do not release monthly figures officially, but we get pretty good unofficial leaks and, according to Monday’s Xinhua, this implies that reserve increases in the month of June were $11.9 billion.

 

Given that the trade surplus and FDI for the month were $21.3 billion and $9.6 billion, respectively, June’s $11.9 billion number is almost certainly going to cause some unnecessary excitement about flight capital.  June’s increase is the lowest monthly increase in a long time, and a lot less than the $54 billion average for the first five months of the year, but most of us were expecting June’s number to be a lot lower than average – in my July 9 entry I guessed it would be about $20 billion.  The main reason for this was June’s 100 basis point increase in minimum reserve requirements, which we believe was re-denominated into dollars, thus bringing headline reserve growth down by about $45 billion.

 

That means the actual amount of net inflows purchased and monetized by the PBoC in June was actually around $57 billion, which is a lot lower than the $67 billion average for the first five months of the year, but this average number includes the two extraordinary months of January and April.  Excluding these, June’s numbers are fairly typical.  The table below shows what really happened, as far as I can piece it together:

 

	Quarter 1	April	May	June	Total
Headline reserve growth	154	75	40	12	281
Trade surplus	43	17	20	21	100
FDI	27	8	8	10	52
Currency gains	38	(12)	1	4	31
Interest	17	6	6	6	35
Unexplained amount	31	57	4	(29)	63
Reserve hike	30	18	18	45	111
Adjusted reserve growth	183	93	58	57	391
Unexplained amount	61	75	22	16	174
Transfer to CIC	75	-	-	-	75
Adjusted reserve growth	258	96	58	57	467
Unexplained amount	136	75	22	16	249

 

We shouldn’t be too concerned with interpreting changes in the month-to-month data because there are timing lags and accounting transactions that we don’t know about, but in the aggregate the total increase in reserves this year would have been about $465-70 billion if nothing had been “outsourced” to proxies, more than last year’s total increase in headline reserves of $462 billion.  About $66 billion of this did not need to be purchased by the PBoC because it represents valuation gains and interest income on their portfolio.

 

Of the roughly $400 billion that the PBoC did purchase this year (thereby creating domestic money and central bank bills for an equivalent amount), the relatively stable FDI and the trade surplus accopunts represent about 38%, with the rest consisting of other inflows, including hot money.  I estimate that FDI has about $15-20 billion of hot money and accelerated disbursals buried in the numbers, and the trade surplus should have at least $10 billion of disguised hot money inflows (assuming average under- and over-invoicing equal to just 1% of total exports and imports), which suggests that trade and FDI may account for significantly less than one-third of the money the PBoC was forced to purchase.

 

What was the rest of the $260-70 billion or so?  Some of it represents official loans, transactions on the services account, income on investments, and a bunch of other things, but clearly there is a lot of other, less stable, money coming into China.  Is it hot money?  That depends on what you mean by hot money.  If you define hot money as any money that came into China or whose disbursal was accelerated largely because of rising RMB expectations, than a lot of this is “hot”.  If your definitions are more restrictive – money that can come in quickly or leave quickly – less is “hot”, but Logan Wright’s guess of $160-180 is not unreasonable, and is perhaps even a little low, since he doesn’t count hot money buried in FDI and trade.

 

The point is that whatever it is, the amount of speculative capital coming into China is big and unstable.  Logan and I discuss why in a piece in Monday’s Financial Times.