China: Surplus Shrinks, Reserves and Credit Grow Amid Speculation on Revaluation

Note the reserve amounts in this post have been amended to reflect the $200 billion increase instead of the $20 billion originally cited.

There are four developments in China to note today.

First, China reported that its reserves jumped to $2.65 trillion from $2.45 trillion in June. The almost $200 bln increase is much more than the $7.19 bln in Q2 and the $48 bln in Q1. The reserve growth poses a management problem for Chinese officials and an absorption problem for rest of the world. China’s portfolio (and direct investment) flows can overwhelm developing and developed markets (see concern from Japan on Chinese bill purchases in the May-July period).

Second, China reported stronger than expected loan growth of CNY595.5 bln. The consensus had been for a CNY500 bln increase, which would have been the slowest of the year. But the actual report puts it at the highest for Q3 and suggests the loan growth will exceed the target this year. The required reserve increase announced earlier this week seems to be in response, though the temporary nature is, frankly, a bit confusing. Perhaps it reflects a compromise formation as there does appear to be some diverging opinions.

Third, despite the surge in CNY loans, the PBOC’s Zhou was quoted by the news wires indicating that there will be no rate hike in the remainder of the year.

Fourth, China reported a $16.88 bln Sept trade surplus. This was about $1 bln less than expected and a little more than $3 bln less than the Aug surplus. This is the smallest surplus since the March-April holiday distortions. Exports rose to $145 bln from $139.3 bln in Aug (25.1% above year ago levels vs 34.4% in Aug). Imports rose to $128.1 bln from $119.3 in August (24.1% year-over-year vs 35.2% in Aug).

These reports, coupled with the talk of currency wars and pressure for China to move quicker on its currency, has seen the 12-month forward widen to now imply about a 3.3% appreciation over the next year, the most since July 2008. It may be more complicated that simply deriving the pace of appreciation from the 12-month NDF. It is a probabilistic world. The 3.3% priced into the 12-month NDF might also implies a 50% chance of a 6.6% appreciation. A 3.3% appreciation over the next 12 months does not seem acceptable to the US and Europe.