Goldman: China FX Outflow Persisted in October

November 18, 2015 Updated: December 7, 2015

A little more than two weeks ago, the People’s Bank of China told us official foreign exchange reserves rose by $11.4 billion for the month of October, the first positive reading in months.

Epoch Times ran the headline “The End of Outflows?” but concluded the answer was probably no. The data released by the People’s Bank of China (PBOC) just doesn’t give the full picture.

Now Goldman Sachs confirms this suspicion. “Banks net sold $30 billion in foreign exchange (FX) to non-banks in October (vs. $115 billion in September). This is in contrast with earlier released PBOC data that indicated an increase in headline FX reserves,” the analysts write, citing data published by the State Administration of Foreign Exchange (SAFE). 

Because China uses state banks to manipulate currencies, data by SAFE is more reliable, as it also reflects the use of derivatives.  

We have previously outlined how China is hiding capital outflows using these non-cash contracts, so the real number for October could be even higher. We will only know once more of the currency derivatives mature.

To illustrate the effect of the derivative contracts, Goldman said the $30 billion includes maturing contracts, which had to be settled for cash in October. 

Not surprisingly, China also reduced the amount of U.S. Treasurys it owns by $12.5 billion, but this data is for September, a month of heavy FX outflows. China now holds $1.258 trillion in U.S. government securities. 

For “Red Capitalism” author Fraser Howie, the capital outflows are a much needed adjustment.

“A year ago, China had $4 trillion of FX reserves. I thought of it as the cost of not reforming. This was an imbalance built into their system by not allowing their currency to float, and not allowing some of this volatility,” said Howie.

Ever since the devaluation in August, China has had plenty of volatility. 

“It becomes a great shock because we have never seen it before. Or it’s always been in such small scale,” said Howie.