Extremely Bad News From China: Forex Reserves Rise In June

Article By: Gordon G. Chang

People’s Bank of China, China’s central bank, stunned observers on Thursday when it announced that the country’s foreign exchange reserves rose in June by $13.4 billion.

The report might be a fib, but it surely is worse news if it is in fact true. If true, the unexpected increase suggests Beijing has gone back to its most controversial trade policy: forcing the renminbi lower to help exporters.

Just about everyone had expected reserves to fall last month bc the currency is considered overvalued — Nomura says by about 6% — & Beijing has been consistently defending it. The cost of the defense has been high. The PBOC, as the central bank is known, spent $473 billion to defend the renminbi between August of last year & this June, according to Financial Times calculations. As a result, the country’s foreign exchange reserves tumbled during the period. At the end of last July, they stood at $3.65 trillion according to the central bank. At the end of June, they were $446.1 billion less.

And in reality, the fall was even greater as the central bank has been engaging in questionable transactions, like Brazilian-inspired tricks involving forward contracts, to make the reserves look higher than they are. Since October 2015, there has been approximately $500 billion of net forex outflow according to Goldman, well above the $330 billion suggested by official data from the State Administration of Foreign Exchange, the central bank unit serving as custodian of the nation’s foreign reserves.

View full article at: http://www.forbes.com/sites/gordonchang/2016/07/10/extremely-bad-news-from-china-forex-reserves-rise-in-june/#f6f357216d54

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