China: March FX reserve data highlight the challenging flow backdrop - Nomura

Analysts at Nomura note that China’s headline FX reserves increased USD4.0bn m-o-m in March to USD3009bn, lower than their expectation of an USD11.0bn rise (Nomura: USD3016bn; Consensus: USD3011bn).

Key Quotes

“After adjusting for FX valuation and coupon payments, FX reserves fell USD9.1bn compared with the USD18.9bn increase in February. While adjusted FX reserves in March suggest a pickup in net outflows when compared with February, the drop in March adjusted FX reserves was still modest relative to the average USD29.6bn fall in the six months to January 2017 (when adjusted reserves fell consecutively on a month-on-month basis).”

“The relatively small fall in March FX reserves is consistent with the moderation in recent outflows as the Chinese authorities have tightened their measures on outflows, with recent effective ones including increased scrutiny of corporate M&A outflows and individuals’ annual FX conversion limits since the start of 2017. Our tracking of Chinese corporate outbound M&A showed USD9.0bn worth of deal announcements in March, a substantial slowdown from the USD18.2bn average in the past six months to February 2017.”

“Furthermore, the Chinese authorities have also attempted to promote capital inflows through ongoing liberalisation of its bond markets, and this may have helped the USD1.2bn worth of bond inflows in March, based on timely data from the China Central Depository & Clearing Corporation. That said, these bond inflows were overwhelmed by the net USD3.1bn of equity-related outflows in March through the Shanghai-Hong Kong stock connect, which has seen continuous net outflows since May 2016. In addition, China’s February FX forwards book showed that USD21.7bn of short USD/RMB forwards will mature in March, but the People’s Bank of China may have rolled a significant portion of these positions, as demonstrated by the flattening of the 1x9m and 1x12m USD/CNH DF curve over this period.”