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China’s Trade and Reserves Data Don’t Add Up

Tuesday came a surprise increase in foreign-exchange reserves. Wednesday, it was an unexpected trade deficit–China’s first in three years–which made the rise in Beijing’s currency hoard even harder to account for.

Economists say the two don’t fit together easily.

Chinese imports in February were up 45% from a year earlier in yuan terms, accelerating from January’s 25% pace, while exports increased just 4.2%. The result: a trade deficit of 60.36 billion yuan ($8.74 billion).

A trade deficit ought to put additional pressure on the People’s Bank of China to support the yuan, by selling down its foreign-currency reserves–but the evidence shows the central bank spent less on defending the yuan last month than in the recent past.

Foreign-exchange reserves rose in February by $6.92 billion to $3.005 trillion, the first rise in eight months. Markets had been expecting a decline of $20 billion to $30 billion, in part because the dollar’s recent strength should reduce the value of China’s holdings of other currencies, such as the euro and yen, in dollar terms.

“It’s really hard to interpret the data at face value,” said Sue Trinh, head of Asia foreign exchange strategy at RBC Capital Markets.

The calendar plays a role in the confusion: China’s long Lunar New Year holiday fell mostly in January this year, while in 2016 it was mostly in February. Economists tend to look at the first two months of the year together. For January and February combined, China had a trade surplus of $42.2 billion–down 56% from a year earlier, but still a boost for the currency reserves.

Even so, the parts don’t quite fit together, says Brad Setser, a senior fellow at the Council on Foreign Relations and former Treasury department official. A combination of a trade deficit and the revaluation effect, plus the capital outflows China has been experiencing for several months, ought to have forced more central-bank intervention.

One possible explanation: The pace of capital outflows has actually slackened. Chinese regulators have imposed restrictions on moving money out of the country, and a relatively stable yuan-dollar exchange rate may have reduced Chinese individuals’ desire to exchange their savings for other currencies.

Still, Mr. Setser said the data overall suggest money may also be moving back into China.

“The hard part though is [foreign exchange] valuation would imply a fall in headline reserves, and they rose–and with the trade deficit, that implies capital inflows, which is a really big shift,” he said.

If capital really is coming into the country in greater quantities, the next mystery is where exactly it is going.

“Perhaps the capital controls that China has implemented have worked to a degree, and the outflow pressure isn’t as acute as it had been,” said RBC’s Ms. Trinh.

But there isn’t much evidence that investors overseas have yet resumed heavy investment in China, she said, despite broadly growing confidence in emerging markets and Chinese authorities’ efforts to coax more foreign capital into the country’s bond markets.
Source: Dow Jones

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