China: something is wrong with the balance of payments

A bizarre disconnect between Yuan payments data and the PBOC (China's central bank) balance sheet is generating a lot of interest among economists and market participants, according to Bloomberg.

Normally when China had a trade surplus, trading companies would sell the dollars they raised to commercial banks. The PBOC then buys the dollars from the banks by selling them yuan and thus preventing them from going to an open market, causing the yuan to revalue. However, this meant that there was a direct correlation between trade surplus and foreign exchange reserves in dollars or other currencies.

However, as the graph below shows, the relationship has started to wear off a bit in 2017, and decoupling has become quite grotesque in recent months.

Data released by Chinese authorities over the weekend shows that Chinese banks bought 691 billion net yuan ($ 107 billion) of foreign currency from customers in December and January, the highest ever recorded (since 2014). rushed from dollars to yuan before the Chinese New Year. Here is a graph showing the conversion

However, as the red line above shows, the PBOC's foreign exchange funds in circulation changed very little, indeed decreased by 24 billion yuan ($ 4 billion) over the two-month period.

According to Bloomberg, what is happening is the following:

• The first hypothesis is that the Chinese central bank has decided not to intervene, but this seems unlikely.
• Second, the Chinese banking system as a whole has accumulated a large amount of dollar liquidity, with an unknown purpose. Why ?

Given that this 111 billion dollar gap between bank holdings and central bank reserves is practically taken from liquidity in Yuan, this will reduce it and, over time, will cause interest rates to rise. Why don't banks sell dollars to the PBOC, since they cannot directly access and buy stocks or other assets directly on international markets? Perhaps the purpose is precisely to force the PBOC's hand and oblige it to guarantee the banks access to international markets. But it will have to be a very strong action to succeed in its purpose.

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The article China: something is wrong with the balance of payments comes from ScenariEconomici.it .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/cina-qualcosa-non-va-nella-bilancia-dei-pagamenti/ on Thu, 25 Feb 2021 07:00:22 +0000.