Why aren’t Chinese reserves growing faster?

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In July, China’s reserves increased by $13.4b or so, reaching $954.5 b.  China’s July trade surplus was $14.6b.   

Valuation changes from moves in the euro-dollar didn’t have much of an impact in July.  Nor did the yen dollar.   The market value of the ten-year Treasury note rose in July (interest rates fell), which would work to increase the dollar value of China’s reserves.  Or it would if China marked its securities portfolio to market, something I am told it doesn’t do.

That implies that on net, capital was flowing out of China, not into China.   Otherwise, the growth in China’s reserves would top China’s trade surplus.  No hot money inflows, a $15b trade surplus and the typical $5b in FDI inflows implies a monthly pace of increase of around $20b …

China is certainly less keen on FDI than it used to be.  And it has been trying hard to discourage capital inflows – notably by keeping domestic rates below US rates.    

But even so, July’s reserve increase seems on the small side.  

Maybe Chinese firms made lots of investment abroad in July.  Or China shifted some of its reserves to domestic financial firms.  Or Chinese retail investors skirted China's capital controls to join Japanese retail investors plying the carry trade. Or something.  

But with the RMB now moving up (it hit the stratospheric heights of 7.941 today,  bringing its move against the dollar this year to close to 1.5% … )  and plenty of talk of further moves (disguised as a widening of the band) before the IMF’s annual meetings, I would personally be surprised to see a sustained fall in hot money flows to China.

As Drezner would say, developing …

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