China’s preliminary current account surplus in Q4 reached a near-record of $130.2 billion, an annualized $443 billon over the past three quarters, or around 2.8% of GDP. In addition, China saw strong foreign inflows under direct investment and into onshore bonds and equities during the last quarter. But the PBOC declared very little direct intervention into foreign exchange markets, and China’s currency rose only gradually despite these extremely strong inflows from the trade surplus and key components of the capital and financial account. The key question remains: If the PBOC is not buying significant volumes of foreign currency to slow the pace of appreciation, who is? Where are the capital outflows to offset China’s near-record inflows?
In this note, we review this data mystery and break some new ground (we hope) within this debate. Key findings include:
• Exporters have not significantly changed how they manage their foreign currency revenues over the past three years. Trade-related transactions do not appear responsible for the missing capital outflows. Using the “foreign-related payments” series from SAFE to track settlement of current account transactions is misleading.
• Commercial banks appear to be acting on the PBOC’s behalf to buy foreign exchange, which is no surprise. But commercial banks have no incentive to run rising net long FX positions when China’s currency is expected to appreciate.
• The recent rise in net long foreign exchange-denominated claims by China’s commercial banks is actually mostly a decline in banks’ liabilities in “other” foreign currencies, which are almost certainly denominated in CNH and indicative of transactions between the PBOC and China’s commercial banks.
There is no significant mystery agent buying or reinvesting China’s current account surpluses and financial account inflows. The central bank’s foreign exchange reserves are probably rising sharply, whether or not they are being recorded as such. And China’s currency will remain under pressure to appreciate as long as strong inflows continue.
