China: FX reserve drain continues - Nomura

China’s headline FX reserves fell by USD69.1bn m-o-m in November to USD3.052trn (the largest month-on-month fall since January 2016), in line with Nomura’s expectation of a USD70.0bn decline to USD3.051trn (Consensus: USD60bn decline to USD3.061trn), notes Research Team at Nomura.

Key Quotes

“After adjusting for FX valuation and coupon payments, FX reserves fell by USD28.6bn m-o-m (estimated USD17.4bn m-o-m drop in October), highlighting intervention by authorities to stabilise RMB against a backdrop of broad post-election USD strength. With the current pace of headline FX reserve loss and global/local dynamics going into 2017, headline FX reserves are likely to break the USD3trn mark in the next few months. This could negatively affect investor sentiment, but at the current pace of outflows we believe China still has enough reserves (even accounting for estimated FX forwards and external assets it could potentially tap) to maintain its current FX policy stance through 2017 – that is, periods of FX flexibility with sporadic FX USD selling intervention.”

“Over the medium term, we expect RMB to depreciate and express this view through short CNH positions against both USD and a CFETS basket in our Asia FX portfolio, given: 1) US political and Fed policy risks, as well as global political uncertainty; 2) net capital outflows, even amid rising exporter remittances, foreign portfolio inflows and more stable local growth; 3) continued RMB overvaluation and as FX policy flexibility is expected to increase over the medium term; and 4) our analysis showing that there may be a bias to keep the RMB TWI stable when broad USD is strong, and weaker when broad USD is soft.”