When it comes to following China's capital outflows, the traditional place to keep track has been China's official reserve data released monthly, which however as we showed previously can and often is manipulated to give the impression of generally smalle numbers. We noted one example in October when China disclosed an official outflow of $43 billion, yet this number was largely incomplete, and short of the total, due to the PBOC's recent adoption of using currency forwards to manipulate the Yuan, something not tracked by the official reserve number.
This is what Goldman said at the time about a relatively more reliable data set which provides a more accurate snapshot of China's capital position:
In our view, a preferred gauge of FX-RMB conversion trend amongst onshore non-banks would be SAFE data on banks’ FX settlement on behalf of their onshore clients (to be out on October 22nd). That report captures banks' FX transactions vis-à-vis non-banks through both spot and forward transactions (for August this data showed an FX outflow of $178bn). But to assess the overall FX-RMB trend, including in the offshore RMB (CNH) market, other FX data sets such as the position for FX purchase would be useful supplements—these are not affected by valuation effects and include FX settlement between the onshore banking system and offshore banks, although they do not account for forward transactions. Data on the position for FX purchase covering the PBOC should be out on October 14, and similar data covering the whole onshore banking system (PBOC plus banks) should be released at around the same date, although this is not completely clear.
It appears that China has finally figured out this loophole to track the PBOC's attempts at masking the sheer size of its outflows, because as SCMP reported overnight, "sensitive data is missing from a regular central bank report in China amid concerns about the flow of cash out of the country as its economy slows and currency weakens."
FT adds that the People’s Bank of China removed the data category “Position for forex purchase”, which tracked total foreign exchange purchases by both the central bank and other financial institutions. In its place, a separate series that captures only central bank forex purchases is substituted. A rise in forex purchases is considered a sign of capital inflows, while a drop suggests outflows.
More from SCMP:
Financial analysts say the sudden lack of clear information makes it difficult for markets to assess the scale of capital flows out of China.
Figures on the “position for forex purchase” are regularly published in a monthly report issued by the People’s Bank of China.
The data, however, is missing from its latest report on the “Sources and Uses of Credit Funds of Financial Institutions in Foreign Currencies”.
Another key item of potentially sensitive financial data has also been altered in the latest report.
As SCMP adds, the central bank regularly publishes data on the ‘foreign exchange purchase” position, which covers all financial institutions including the central bank. The figure was 26.6 trillion yuan (HK$31.7 trillion) in December. The data published in January, however, only gives information on forex purchases by the central bank and details the lower figure of 24.2 trillion for last month.
The report (source) and line item in question are shown below:
Why the dramatic change in what is arguable one of the most important data series about the Chinese capital situation, one which comes at a time when China has been outflowing around $100 billion every month, shringking its total reserve holdings to dangerous levels? We don't know: SCMP writes that the press office at the People’s Bank of China bank has yet to respond to telephone calls or a faxed request for comment about the changes.
As it also adds, "the central bank has tweaked items on its financial statements before, but the latest unannounced change comes at a particularly sensitive time when Beijing is trying hard to stabilise the yuan exchange rate. It is also just a week ahead of the G20 central bankers and finance ministers meeting in Shanghai."
As a reminder, many expect that China may announce a major devaluation at the upcoming G-20 meeting, which some such as Bank of America have dubbed the "Shanghai Accord."
The result is that China's already opaque and manipulated economic picture, will become even more so:
“The central bank used a non-transparent method which makes the market unable to have a clear picture about capital flows,” said Liu Li-Gang, chief China economist at ANZ in Hong Kong.
“Given current circumstances, the move will fuel more speculation that the country is under great pressure from capital outflows. It will hurt the central bank’s credibility.”
An in-house analyst at an investment bank in Beijing, who declined to be named, said the changes were technical, but reflected the central bank’s intention to hide China’s real capital flows.
As we noted above, SCMP explains that according to analysts it was common practise to calculate China’s capital outflows by looking at the gap between positions on the yuan throughout the financial system and at the central bank alone, but the changes by the central bank would make this calculation impossible.
All data related to foreign exchange released by the central bank is closely monitored by financial analysts. They often read item by item from the dozens of tables and statistics released by the People’s Bank of China to spot new trends and changes.
What makes matters worse for China is that as Xie Yaxuan, chief economist at China Merchants Securities, says the central bank was unable to conceal data as there were many ways to obtain and assess information on capital movements.
“We are waiting for more data releases such as the central bank’s balance sheet and commercial banks’ purchase and sales of foreign exchange released by the State Administration of Foreign Exchange for a better understanding of the capital movement and interpreting the motive of the central bank for such change,” said Xie.
This means that if China truly intends to cover up how much capital is fleeing the mainland on any given month, it will have to fudge, delete, adjust and otherwise manipulate virtually every other capital account series, making a complete mockery of its already laughable economic reporting.
We wonder what the IMF will have to say about this significant occlusion to a critical currency data series by the newest member of the SDR basket.
Our take on this drastic escalation to keep analysts in the dark:
- It confirms China is panicking about its capital outflows if it has to engage in such an unprecedented step
- It suggests that outflows are far worse than the official reserve data admit, which as a reminder revealed a $99 billion outflow in January, the second largest ever.
As to whether China's attempt to mask its outflows will succeed, there is perhaps a just as good gauge of Chinese capital outflow, or rather its inverse: the amount of Chinese capital inflows in the one place where it traditionally ends up: Vancouver real estate. Judging by the chart below, there is no risk of any slowdown in capital outflows out of China any time soon.
Finally, the real question is what impact on the local population, which as a reminder has over $20 trillion on deposit in local banks which are now openly plagued by soaring non-performing loans making the reality of a Chinese bail in all too real, this admission that money is flowing out at an ever faster pace will have.