Richard McGregor helps to solve the mystery of China’s slow q3 reserve growth.

The increase in China’s q3 reserves was about $30b below my expectations.  China’s current account surplus is usually about $15b per quarter larger than its trade surplus, and net FDI inflows have been around $15b a quarter as well.   That implies $80b in reserve growth, not $50b.

What happened?   Richard McGregor – citing Qing Wang – thinks it is possible that China encouraged state banks and state firms to hold on to their dollars, not to sell them to the central bank.

McGregor in today’s FT.

Qing Wang, of the Bank of America in Hong Kong, said in a research note that the authorities had made “systematic efforts to encourage major financial institutions to keep their foreign exchange assets offshore”.

This includes allowing state companies, such as the banks that have listed overseas, to leave some of the billions raised in initial public offerings offshore.

That story makes sense to me.    Chinese purchases of US assets have been very, very strong in q3 – a data point that is consistent with offshore accumulation of dollars by Chinese state firms along with continued reserve growth, but not consistent with a big fall in the overall accumulation of foreign assets by China.

I don’t doubt that China’s policy of limiting RMB appreciation (the pace of appreciation slowed in October) and keeping Chinese interest rates below US rates has limited hot money inflows.   But I would be surprised if $30b or so in hot money really left China in q3. 

China has long used its state banks and state firms to support state goals – like creating jobs.  Now it looks to be using them to limit the PBoC’s fx exposure.

I guess that is the quid pro quo for helping state banks and state firms out in other ways, not the least buying dud loans off their books at par.