JPMorgan Econ FI-China FX reserves beat again Gold price onshore signals CNY...-107441531

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Asia Pacific Economic Research

07 April 2024

JPMORGAN

www.jpmorganmarkets.com

Emerging Markets Asia, Economic

and Policy Research

Tingting Ge

(852) 2800-0143

tingting.ge@jpmorgan.com

Haibin Zhu

(852) 2800-7039

haibin.zhu@jpmorgan.com

Grace Ng

(852) 2800-7002

grace.h.ng@jpmorgan.com

Ji Yan

(852) 2800-7673

ji.yan@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

China’s FX reserves delivered upside surprise again in March, rising US

$19.8bn to $3,245.7bn. It compares to our forecast for a tick lower to US

$3,223.5bn, pointing to 1) larger-than-expected trade surplus or current account

surplus, or 2) smaller-than-expected implied capital outflow.

•Current account surplus likely to have stayed elevated. China’s

merchandise trade activities beat expectations significantly from the year’s

start, with a 6.7%m/m sa jump in exports and 1.7% rise in imports. The

momentum may have been partly carried over into March though the pace may

have moderated. Export orders component of both manufacturing PMIs picked

up in March, up 0.8-pt to 51.6 for Caixin PMI, and up 5.0-pt for the NBS PMI.

Our baseline forecast looks for another 0.5%m/m sa gain in exports, along with

a 1.0% rise in imports, leaving trade surplus at a solid US$70.0bn. However,

the upside surprise in March FX reserves suggests it is likely trade surplus or

current surplus will come in wider than expected. It points to upside surprise

in exports, or downside bias to imports.

•An estimated implied capital outflow of $12.8bn after the moderate $7.9bn

inflow in February. The US dollar index inched up from 104.2 to 104.5 in

March, leading to an estimated currency valuation loss of US$4.3bn. We tweak

our current account surplus forecast higher to US$37.0bn (vs. $22.4bn on

average in Jan-Feb), and thus estimate an implied capital outflow at US

$12.8bn, compared to the revised estimate of US$7.9bn inflow for February.

Gold reserves rose for the 17th consecutive month, though at a much slower

monthly pace amid gold price rally. From November 2022 to March 2024, China

has increased its gold reserves by 10.1mn oz, or up by 16.1%. Central bank’s gold

reserve accumulation is not a China-specific phenomenon. Global central banks

and other quasi-official institutions (especially sovereign wealth funds)

maintained a solid gold purchase pace in 2023 (1,037.4 tonnes) after a very strong

print in 2022 (1,081.9 ton), compared to the 469 ton average annual pace in the

prior five years. However, amid recent gold price rally, the monthly gold reserve

increase slowed to 0.16mn oz in March, compared to the average pace of 0.47mn

oz in 4Q23, or 0.62mn oz in the prior 16 months. Recent rally in gold price was

partly triggered by the rising attraction of gold as a non-yielding asset when the

market prices in a closer rate cut, along with solid retail demand in China amid the

sluggish housing and underperformed equity market. While fundamentals remain

supportive over the medium term, our global commodity strategist think recent

financial-led breakouts came quite abruptly and appear to be running ahead of

near-term drivers. The latest non-farm employment surge has led our US

economists to push back the first Fed cut call from June to July. Though we still

have 75bp of Fed cuts through year-end, ongoing growth resilience and sticky

inflation raise the odds of fewer cuts. It suggests macro backing to current gold rally

is lacking and likely risk a bit of a near-term unwind. If it happens, gold reserves

increase likely will reaccelerate.

Gold prices onshore vs. offshore signal further room for CNY depreciation,

though more depends on the PBOC’s CNY fixing. The USD/CNY daily spot has

consistently stayed above daily fixing since the beginning of the year. The cross of

7.10 handle on March 22 at 7.1004 after a roughly flat CNY fixing at sub-7.10

See page 4 for analyst certification and important disclosures.

China: FX reserves beat again

Gold price onshore signals CNY depreciation pressure,

but more depends on PBOC’s CNY fixing

Tingting Ge (852) 2800-0143

tingting.ge@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

Haibin Zhu (852) 2800-7039

haibin.zhu@jpmorgan.com

Grace Ng (852) 2800-7002

grace.h.ng@jpmorgan.com

Ji Yan (852) 2800-7673

ji.yan@jpmorgan.com

Asia Pacific Economic Research

China: FX reserves beat again

07 April 2024

JPMORGAN

previously, and relatively light smoothing flows from state banks triggered market

enthusiasm of greater FX flexibility. Despite a stronger CNY fixing back to sub-7.10 levels,

the market trading tested the upper-bar of the 2% daily trading limit at around 7.24 for

multiple times in the past two weeks. While gold prices have surged significantly since late

February, the onshore gold price (in CNY terms) and offshore gold price (in USD terms) point

to consistent CNY depreciation pressure. Lately, the onshore/offshore gold trading price

implies USD/CNY rate at around 7.32. While historical data suggests onshore/offshore gold

trading price implied USD/CNY and spot exchange rate tends to co-move, the gap has opened

since September 2023. Back then, the PBOC started to shift its focus of the managed floating

RMB exchange rate regime from “floating” to “managed”. In this regard, while gold prices

onshore vs. offshore signal further room for CNY depreciation, we think it still depends on

the PBOC’s CNY fixing. Though resiliency of the US economy and lingering uncertainty

around the timing and pace of the Fed’s pivot will continue weighing on CNY, it is likely the

PBOC will hold onto a strong daily fixing, and wait for market expectation to return to where

it was before March 22. For CNH, while it touched 7.28 right after March 22, the highest level

in more four months, it returned to around 7.25 last week. If CNY or CNH is chased higher,

it will likely trigger more smoothing flows from state banks, more window guidance or

macro-prudential measures from the PBOC etc. We don’t see much evidence that the PBOC

has meaningfully shifted its attitude to CNY to allow for greater flexibility to absorb

accumulated depreciation pressure implied by market pricing. The visibility for USD/CNY

to trade meaningfully higher, such as breaking 7.30 in the near term still seems low.

Equity turned into outflows in March though bond inflows likely have continued,

leaving total foreign holding of Chinese bonds back to the 2021 peak level. Foreign

investors increased their holding of Chinese bonds substantially into the year-end of 2023,

and the momentum seems to have been partly carried over into this year. After the record-high

net purchase of US$35.2bn in November, there was another net inflow of US$25.3bn in

December and US$28.4bn net bond inflows in January. Then it was followed by further

moderate US$11.2bn net bond inflows in February, mostly driven by the US$13.3bn inflows

for NCDs, despite a US$2.3bn net outflow for CGB and policy bank bonds. With that, total

foreign holding of Chinese bonds have largely returned to the 2021 peak level. However, FX

impact of recent bond inflows is more masked by the PBOC’s FX management. Also, some

of recent bond purchase is FX hedged, and may continue in the near term despite unfavorable

US-China interest rate differential. For equity flows, after the US$5.3bn net inflows in

February, stock connects recorded US$7.9bn net outflows in March, with $3.1bn inflows via

Northbound Connect, and $10.9bn outflows via Southbound Connect.

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

USD trillion, eop

China's FX reserves

Source: SAFE

-200

-150

-100

-50

15 16 17 18 19 20 21 22 23 24

USD bn

Source: SAFE, J.P. Morgan

China's capital outflow (monthly estimate)

Tingting Ge (852) 2800-0143

tingting.ge@jpmorgan.com

JPMorgan Chase Bank, N.A., Hong Kong Branch

Haibin Zhu (852) 2800-7039

haibin.zhu@jpmorgan.com

Grace Ng (852) 2800-7002

grace.h.ng@jpmorgan.com

Ji Yan (852) 2800-7673

ji.yan@jpmorgan.com

Asia Pacific Economic Research

07 April 2024

JPMORGAN

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

oz mn

China official reserve asset: gold

Source: PBOC, J.P. Morgan

6.0

6.5

7.0

7.5

8.0

20 21 22 23 24

Onshore/offshore gold price implied

Spot

CNY/USD exchange rate

Source: Bloomberg Finance L.P., J.P. Morgan

Daily

100

110

120

130

140

150

160

20 21 22 23 24

Onshore (in CNY)

Offshore (in USD)

Gold price

Source: Bloomberg Finance L.P., J.P. Morgan

Index, Dec 31, 2019=100

6.2

6.4

6.6

6.8

7.0

7.2

7.4

Jan 22 Apr 22 Jul 22 Oct 22 Jan 23 Apr 23 Jul 23 Oct 23 Jan 24 Apr 24

CNY/USD

CNY fixing

CNY exchange rate

Daily

Source: Bloomberg Finance L.P., J.P. Morgan

-15

-10

-5

Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24

Stock Connect net flow Southbound

Northbound

USD bn

Source: Wind, J.P. Morgan

Jan '21: 40.1bn

-20

-10

Jan/18 Jan/19 Jan/20 Jan/21 Jan/22 Jan/23 Jan/24

CGB PFB NCD Others

Monthly foreign inflows to Chinese bond market

USD bn

Source: Haver, J.P. Morgan

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