A lot of how you decide to view the Chinese April trade and foreign exchange report, depends on what exactly you measured. April exports were higher than March exports but were down YoY and YTD YoY if measured in USD. However, if measured in RMB exports YoY was actually up 4% but remains down YTD 2.3%. In some ways, this data can be viewed positively or negatively, but I am going to try and help provide some personal perspective.
- While the month to month and year over year snapshots are important, I firmly believe that the YTD are much more important. MoM and YoY can induce a sense of noise or bias into analysis that skews our understanding. YTD exports are down 8% from 2015 and imports YTD are down another 13%. What makes the import growth some amazing is that full year import growth was down strongly in 2015 and flat in 2014. It is difficult to see how these are positive signals for an economy as you stretch the time horizon out.
- While the trade surplus again remains strong this is a very deceptive measure for a couple of reasons. The trade surplus remains strong not because trade is increasing but because imports are shrinking much faster than exports. Whether you look at it on a YoY or YTD YoY trend, it is clear that imports are shrinking faster than exports. While some of this can be attributed to factors like commodity price drops, it is also clear that some of this needs to be attributed to weak Chinese demand.
- The other reason that the trade surplus is incredibly deceptive is that the actual surplus if measured by cash, which is really what matters, is much much smaller. Through March, Chinese Customs reported a surplus of $126 billion USD while banks reported a surplus in goods trade receipts of $23 billion. This means there is a $103 billion discrepancy between the official trade surplus number and what cash is actually flowing into China. Given the $46 billion surplus reported for April, we can probably expect that this resulted in a bank receipt surplus of $10-12 billion USD.
- Extrapolating this into the official amount of FX reserves is where things start to get a little debatable. To date, the only category in surplus on a cash basis in Chinese banks in goods trade and it is small at only $23 billion. All others are in significant monthly and year to date deficit. For instance, through Q1, YTD outflows are almost equal to Chinese net outflows through November in 2015 YTD. Capital account receipts are plunging and outflows are up almost 40%. This is a very consistent pattern in each month and summing across Q1. If this patterns holds in April, this would imply a net outflow of at least $30 billion through official bank payment channels. Despite talk of how USD valuation drove FX reserves up, the EUR was essentially unchanged against the USD in April. The JPY which was up almost 5% against the USD but by most estimates comprises no more than 15% of PBOC reserves should not swing the portfolio that much. If we assume the JPY has a 15% portfolio weighting and moved 5% in the PBOC’s favor, this should result in no more than a $24 billion boost. This at least gets us closer to explaining the PBOC official data that reserves rose but as many have noted is an increasingly difficult number to reconcile to other data. This would have to imply a much small outflow.
- The reason for the skepticism is that it is increasingly difficult to reconcile the ongoing outflows, even after accounting for valuation, with the stabilizing and actually increasing reserves. For example, in the past three months when FX reserves were stabilizing and then slightly increasing net outflows have actually gone up by most measures. This is simply difficult to reconcile though I think it is fair to say that while there is suspicion and concern, there is as of yet no smoking gun or hard evidence of how they are making this number appear so rosy.
- Too many people focus on the level of FX reserves rather than the net outflow number. If you run a fixed exchange rate regime, you cannot sustain net outflows for an extended period of time. Despite the rosy official trade surplus, underlying cash flows have if anything accelerated this year, though there may be some evidence that capital controls are starting to bite though it is too soon to tell if that is just Chinese New Year seasonal fluctuations. Even if the FX numbers are perfectly accurate, the ongoing level of sustained outflows should absolutely be the bigger topic of discussion.