Concern has been raised over the deterioration of the Chinese economy even though growth is officially only set to slow by a few tenths of a percentage point. The signals coming from Beijing indicate a greater level of worry than the shift from 7.4% to 7%, officially speaking of course.
As I have noted in other writings, despite its reputation as prudent money manager, China and the PBOC have overseen one of the fastest expansions of the money supply in the world in the past decade. Excluding countries suffering from serious or hyper inflation, even after controlling for real economic growth, China has witnessed one of the highest rates of growth in money supply in the world.
According to State Administration of Foreign Exchange (SAFE) data, net purchases of foreign exchange averaged nearly $300 billion USD annually since 2001. As recently as 2013, total net purchases of FX in USD terms equaled nearly $400 billion USD. However, since peaking in late 2013 early 2014, net foreign exchange purchases have deteriorated rapidly on both a monthly and annual basis.
There are a number of interesting conclusions to draw from all this. First, monthly net foreign exchange purchases as recorded by SAFE have not witnessed such a sustained period of net sales (outflows) since January 2001. There was a brief period in the middle of 2012 when net monthly purchases turned briefly negative during a couple months. However, it was smaller, inconsistent, and shorter in duration. Net monthly purchases are prone to relative volatility, but the overall trend and size are important to note.
Second, if we consider annual purchases on a rolling basis, there is a brief period in late 2012 when the net annual FX purchases by SAFE drop beneath $100 billion. However, as was noted with the annual purchases, this trend quickly reversed and by February 2013 rolling 12 month purchases were back up above $200 billion USD.
Third, if we consider annual purchases around fixed dates either after Chinese or calendar years, to adjust for potential seasonal issues, we see clearly the magnitude and speed of the change. 2002 was the last calendar year China had net FX purchases under $100 billion USD with a similar result if we adjust the calendar to account for Chinese New Year differences. From March 2013 through February 2014, China enjoyed net FX purchases of $387 billion USD. From March 2014 through February 2015, China saw net FX purchases of just $12.6 billion USD a decline of 97%.
Fourth, if we focus on FX purchases since January 2009, the pattern indicates that since about late 2012, gross purchases have grown more slowly while gross sales have continued to grow rapidly. The net result is that net purchases have declined dramatically. In July 2010, gross purchases of FX by Chinese banks reached a new monthly high of $114 billion USD. In February 2015, the latest month with available data, gross purchases totaled $115.6 billion USD. Conversely, gross sales in the same months grew from $88 billion USD to $126 billion USD. In other words, while inflows into China have essentially gone flat, outflows have continued on trend.
Fifth, while China is in no danger of a run on the currency or exhausting its FX reserves this does appear to portend a much broader and severe slow down in the Chinese economy. If gross purchases are essentially flat, this means that both investment in China and Chinese exports are not growing or tepidly. Given the concern expressed by foreign companies in China over the capricious regulatory environment, anti-foreigner sentiment, and costs, to name just a few worries, this appears to be hitting inflows.
Though too soon to tell if it is a longer term trend, this does appear to be a longer trend than the 2012 phase. It does however appear to signal much greater weakness in the overall Chinese economy.