I often launch into rants triggered by statements about China's reserve growth - and about hot money flows - that seem to be based entirely on the reported increase on China's reserves.

My beef?  China's reported reserve increase combines two things.  The amount of foreign exchange the central bank bought in the market.   And changes in the dollar value of China's reserve assets stemming from changes in the dollar/ euro, dollar/ yen, dollar/ pound and so on.   The central bank's actual purchase of foreign exchange -- the key number -- can only be inferred from the reported reserve increase.

Valuation changes are potentially quite significant.   So significant that a wrong call on the euro/ dollar ruined the career of a senior Chinese official back when China only had $200 billion in total reserves.  Now China has $820 billion in reserves, and at least $160 billion (20%) and perhaps as much as $240 billion (30%) in reserve assets denominated in euros, yen and other currencies not named the US dollar.  So a 10% annual move against a composite of the euro/ yen/ pound would reduce (or increase) China's reported reserves by somewhere between $16 and $24 billion.

Rather than just complain, I decided to do something.   RGE monitor is now producing a "China reserve watch."   Alas, I have to reserve this kind of analysis for RGE subscribers.  But I do want to highlight a couple of key points for the broader audience that participates in this blog.