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China's FX Reserve Accumulation Slowdown in Q2 Due to Weak Euro, Hot Money Outflows

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July 12,2010
China's FX Reserve Accumulation Slowdown in Q2 Due to Weak Euro, Hot Money Outflows

By Morgan Stanley

China's foreign reserves hit new high at US$ 2,454bn in June from US$ 2,447 bn in March. However, the headline FX reserve accumulation was mere US$ 7.2bn in 2Q. In view of the widened trade surplus (US$ 41.2 bn in Apr-Jun) and stable FDI inflows (US$ 15.5 bn in Apr-May), about US$ 57.5bn appears to have been 'missing' from foreign reserves (assuming US$ 8 bn for FDI in June, the average of monthly value during Jan-May). We, however, estimate that recent sharp depreciation of Euro may have explained about US$ 79.5 bn of valuation loss of FX reserves in US dollar terms, while investment income and mark-to-market of FX assets at period end may have added US$ 28.3 bn to FX reserves. The net effect helps explain US$ 51.3 bn of the 'missing' US$57.5bn. We also estimate that the remaining US$ 6.3 could be attributed to the deprecation of Japanese Yen (US$ 0.2 bn) and hot money outflows (US$ 6.1bn).

Moreover, we estimate that there were about US$39.6bn hot money inflows in April and about US$ 41.6 outflows in May. The outflows in May may have to do with weakened expectation of RMB appreciation against US dollar in that month. However, the official announcement by PBOC to de-peg with US dollar on June 20 may have contributed to renewed expectation of RMB appreciation, contributing to a decline in money outflow to about US$ 4.2 bn in June, we estimate.

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