China’s 1Q balance of payments details reveal the case for continued RMB appreciation, at least for a few more months. There are still multiple sources of fundamental inflows for foreign exchange, and no obvious source of counterbalancing outflows. The outflows that are occurring are being recorded under a surprising surge in outbound lending and overseas FX deposits by Chinese firms, which reflect new measures to recycle dollars into global markets without expanding the PBOC balance sheet. These dollar recycling channels do not appear to be tied to any actual overseas borrowers, other than Chinese banks.
