from Follow the Money

China’s reserves increased by $29b in July.

September 20, 2005

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They rose from $711 b at the end of June to around $740b at the end of July. if all $29b flowed into the US, it would be enough to finance about 1/2 of the July trade deficit

And since the euro/ dollar was basically flat in July (end June = 1.2098, end July = 1.2129), the rising dollar value of China's euro reserves cannot be the main explanation for the increase.

China's trade surplus is around $10b a month, and it typically is getting about $4.5-5 billion in net FDI inflows.  So a $29 billion increase in July implies large - almost $15 billion - in hot money in flows.  That answers some of my questions about the impact of the revaluation. 

Memo for the Cleveland Fed: your analysis of China's capital account needs to consider inflows and capital controls that currently limit inflows as well as potential outflows and controls that limit outflows.  Right now, the inflow controls are being tested far more than the outflow controls.  The controls on inflows leak, but they still have an impact.  They make it harder to bet on RMB appreciation.

The August reserve total will be interesting.  It will include some valuation gains - the euro ended August at 1.233.  And it will include any post-revaluation not money flows.  Unless something changed in August, the increase could be very large indeed.

Note: China's reserve total leaves out the $15b that China transferred to one of the state banks this year. Its total reserve accumulation through July is thus $740-$610+$15b, or $145 billion.  That is over $20b a month.  And that total comes in the face of large valuation losses on China's euro holdings.

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