The detailed tables for China‘s July monetary statistics suggests that money continues to flow out of the country.
The position for FX purchase decreased by about RMB4 billion in July compared to the previous month. Removing the effect of trade surplus of about RMB 160 billion, the apparent capital outflow for July amounted to about RMB164 billion. The last episode of sizeable outflow happened during the 2008/09 financial crisis, but the current episode is already worse than the 2008/09 one.
Note that the implied outflow here does not remove FDI flows or US dollar short-covering, so it is difficult to be sure where this apparent outflow is going to. The chart below shows the derived outflow.
Photo: People’s Bank of China
The on-going outflow as inferred from the changes in the FX position of banks and the first balance of payments deficit since 1998 confirm that money are no longer consistently flowing into the country. Because part of the money creation of China in the past arose from exchange rate intervention to offset the pressure of appreciation exerted by massive inflow and trade surplus, the on-going outflow suggests that money creation would have gone into reverse, tightening liquidity. As a result, we continue to believe that this makes easing somewhat more difficult than it is widely believed in the market. In particular, reductions in reserve requirement ratios and reverse repo are not real easing, but to offset the tightening effect arises from money outflow.
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