China: FX reserves close to expectations in April - Nomura

China’s headline FX reserves rose by USD7.1bn m-o-m in April to USD3.220trn, which as Nomura reports, is close to their expectation of flat month-on-month reserves.

Key Quotes

"This is the second month-on-month headline increase since October 2015 and is occurring during a period in which China’s macroeconomic data is stabilising. However, after adjusting for FX valuation and coupon payment effects, we see that FX reserves actually fell by USD19.3bn, in line with our expectation of an USD20bn adjusted decline (mainly a result of JPY strength). This fall in adjusted FX reserves continues the recent trend of net outflows but it is well below recent peak outflow of USD141.6bn m-o-m in December 2015 and smaller than the USD42.0bn drawdown in March."

"Indeed, we noted that flow dynamics in China have continued to improve, as reflected in cross-border loans data, trade-settlement flows and corporate FX forward hedging. Foreign holdings of RMB financial assets (including equities, bonds and bank deposits) also rose by USD27.5bn in March (latest available as released by PBOC), which follows USD157.1bn in total outflows between August 2015 and February 2016 and likely reflects some expectations of more stability in China macro/financial markets. The average CNH/CNY spot basis also remained low at 86 pips in April versus an average of 346 pips between August 2015 and March 2016, although this is still wider than the average basis of 14 pips in March."