Editor Pick: Chinese Reserve Growth

Anthony Chan of Alliance Bernstein adds to the discussion of high Chinese reserve growth in Q1. Like other commentators, most notably Jon Anderson at UBS and Stephen Green at Standard Chartered, Chan attributes a large part of the surge in reserves to the unwinding of offshore fx swaps and repatriation of Chinese IPO proceeds. A smaller portion likely represents hot money betting on RMB appreciation.

He cites two explanations why these swaps were not rolled over when domestic liquidity was already high.

1) Chinese banks are seeking to take advantage of RMB appreciation and the narrowing yield differential between Chinese and U.S. bonds (an explanation put forward by the PBoC). Chan argues that this pursuit of profit by Chinese banks  "suggests that the PBOC’s control of local banks may not be as strong-arm as believed."

2) allowing RMB liquidity to increase ahead of the creation of new state foreign exchange investment agency. If so, "the extra liquidity will eventually be absorbed with no additional monetary sterilization required of the PBOC."

He concludes that these short-term inflows likely represent a one-off event but predicts large steady short-term inflows which will put great pressure on the PBoC's sterilization program.

China’s FX Spike is a One-Off Burst Short-Term Inflows Remain a Risk