Where are China’s dollar inflows going?

CHINA FINANCIAL - Report 05 Oct 2020 by Michael Pettis

• In recent months the PBoC’s reported foreign exchange reserves have not behaved properly given the huge increase in inflows on the trade and financial accounts. The trade surplus has exploded to 4-5 percent of GDP, from less than half that, and net portfolio inflows are equal to over 2 percent of GDP. And yet reserves seem barely to be changing except partly to reflect valuation impacts.
• But while the PBoC has not been acquiring US dollars, other Chinese institutions have been, and in large amounts.
• This has positive implications for the trajectory of the Chinese currency over the rest of this year and probably longer. The RMB is unlikely to weaken against the CFETS basket of currencies in the near term, and may even get stronger. This doesn’t mean, however, that it will be stable against the dollar, whose own strength and weakness will be reflected in USD-CNY.

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