The November Fall in China’s Reserves and Rise in China’s Real Exports

China’s reserves fell by $69 billion in November.

With the notable exception of Sid Verma and Luke Kawa at Bloomberg, Headlines generally have emphasized the size of the fall

The Financial Times was pretty restrained compared to the norm, and the FT still highlighted that the November fall was “the largest drop since a 3 per cent fall in January.”

But the fall was actually a bit smaller than what I was expecting.

Valuation changes on their own knocked $30 billion or so off reserves (easy math—$1 trillion in euro, yen and similar assets, with an average fall of 3 percent in November).

It isn’t quite clear how China books mark-to-market changes in the value of its bond (and equity portfolio).

My rough estimate would suggest mark to market losses on China’s holdings of Treasuries and Agencies of about 1.5 percent, or $20 billion (Counting the agency portfolio and Belgian custodial book, per my usual adjustment). Bunds and OATs (French government bonds) also fell in value—but SAFE likely has a couple hundred billion in equities too, and their value rose. But it isn’t clear that all of China’s assets are marked to market monthly, so there is a bit of uncertainty here not just about the overall performance of the portfolio, but also how the portfolio’s value is reported.

Sum it all up and it is possible valuation knocked somewhere between $30 and $50 billion off China’s headline reserves.

Which implies that “true” sales were between $20 and $40 billion.

And frankly that seems a bit low.

The proxies (my term for the FX settlement data and the PBOC yuan balance sheet data that are proxies for actual intervention) haven’t been telling a consistent story recently. But the PBOC balance sheet data suggests monthly sales in the $30-40 billion range and there is good reason to think that the pace of sales picked up in November.*

Depreciation (against the dollar) tends to spur expectations of more depreciation (against the dollar)—even if the depreciation against the dollar is fully explained by the mechanical operation of a basket peg. And, well, China presumably tightened its controls on capital outflows—notably by introducing much tighter controls on outward FDI—because it was either worried about the current pace of its reserve loss, or was worried that the pace might pick up in the future.

Makes me all the more impatient to see the more reliable indicators for November.

On the trade side, there was real news in the November data. Nominal exports (in yuan terms) jumped around 6 percent. If export prices stayed at their October level, real exports rose at a similar pace. That bit of good news was needed. Export prices rose by more than I projected in October, which means real exports in October were weaker than I initially thought: the Chinese data shows a 2 percent fall in goods export volumes for October. The strong November pulls my initial estimate of the year-over-year expansion in volumes over the last three months back into positive territory. Not great to be sure, but in line with the weak overall global trade numbers (U.S. imports, especially of consumer goods, have been weak; the commodity exporters are still adjusting to the 2014 commodity slump). Real imports for November look to be up about six percent as well (nominal imports are up more, so a lot depends on the evolution of import prices), China’s stimulus over the past year seems to have stabilized import demand.

* Since the end of June, average monthly sales, using the change in foreign exchange reserves reported on the PBOC’s yuan balance sheet, have been $37 billion. I prefer the total for PBOC foreign assets for technical reasons, but that is harder to explain and the gap isn’t big—$33 billion versus $37 billion.