Foreign Reserves Rise In December

Foreign reserve data from China released aftermarket yesterday, the data showed foreign FX reserves rose more than expected in December. Reserves rose 1.2% in December to $3.216tn, reserves rose 1.6% in November denoting the biggest single month increase since 2013.

• At $3.216tn the figure is still within the range of estimates from $3.18tn to $3.228tn.
• The increase is likely to fuel speculation that China has continued to intervene in its currency. The yuan appreciated around 7% in 2020.
• China is still on the US Treasury's currency manipulator watchlist, despite the fact the PBOC has pledged not to intervene in the market directly. There is speculation that the PBOC utlilises state banks to buy US dollars in the market and keep the transactions off the PBOC's balance sheet.
• The PBOC recently lowered the "macro-prudential adjustment factor" for cross-border financing by companies which should allow domestic companies to increase overseas borrowing, the move comes hot on the heels of measures that increase the amount Chinese companies can lend to foreign affiliates.
• All these procedures appear designed to reduce yuan inflows and curb USD borrowing, and the PBOC still has some dry powder in the form of increases in the QDII quota and foreign currency purchase restrictions.
• For today at least it appears the PBOC can relax, the greenback has pushed higher alongside yields, which has narrowed US/China spreads spurred USD inflows.
• There is some discrepancy between market forecasts and forward points though, and the path for the yuan is far from certain, but the PBOC do appear to be positioning to stem yuan strength, or at least slow it.