Much has been made of the great FX reserve liquidation that’s characterized the post-yuan devaluation investment landscape.
Of course in reality, the selling of US (and other core) paper began when the petrodollar met its demise in November of 2014. As oil prices collapsed, it became clear that the “great accumulation” was likely over.
But the market operates on a time lag, so it wasn’t until the end of August 2015 (after a veritable stock market crash on the morning of the 24th) that the world woke up to the fact that when countries like China and Saudi Arabia begin to draw down their FX reserves, it amounts to QE in reverse. It didn’t take long before banks began trying to quantify the effect of this reversal on DM rates.
Fast forward 18 months and the liquidation of EM reserves is barely news. But just because China’s UST selling and the effect low oil prices have on Riyadh’s SAMA reserves no longer make the front page doesn’t mean we should forget the impact said selling still has on markets.
With oil at a kind of crossroads (will we see an extension of the production cut deal or is it six months and done?) and with the debate raging about whether Beijing will still have an adequate buffer if the PBoC continues to intervene in the spot market, I thought this an opportune time to highlight the following chart and color from Goldman.
Exhibit 2 shows FX-valuation adjusted reserve accumulation across 24 emerging markets, which we have grouped by region. It is clear that China was by far the largest source of reserve accumulation in emerging markets until 2014, whereupon reserve losses by China shifted the overall picture negative. Exhibit 3 shows the same picture, but shows monthly data and illustrates that China’s reserve losses have slowed from peak levels in late 2015 and early 2016. What is notable is that China’s reserve losses contrast with the rest of non-Japan Asia (NJA), where governments have allowed their currencies to weaken more, which has buffered official reserves.