It is not easy being a bear on China — at least, not this month. Data, events and even market moves are conspiring to complicate what, just a month ago, looked to be a relatively simple story. And yesterday the most hard-to-fudge part of the “sell China” case, namely rising capital outflows, also confounded forecasts by slowing sharply. Bears may shrug, but they should tread carefully, too.
China’s foreign exchange reserves fell by $28.6bn last month, far less than the near-$100bn run-rate of the past few months. The lunar new year holiday in the middle of February will have played a part, but market moves also suggest the country has succeeded in diluting January’s strong “sell China” narrative. The offshore renminbi — considered the gauge of international sentiment — has in the past four weeks spent more time trading more strongly against the dollar than the tightly controlled onshore rate than at any time since last August’s surprise devaluation.
Shorting the renminbi is based on the argument that China is running out of liquid reserves with which to combat identifiable and intensifying capital flight. Both parts of that case were also dented at the weekend. The People’s Bank of China asserted that its reported reserves are in fact liquid, in an effort to quell doubts. It may or may not succeed. But few will be able to as easily shrug off research published this week by the Bank for International Settlements that suggested third-quarter outflows last year — that is, immediately after the August brouhaha — were due mostly to companies paying off dollar debt, and to a reduction in offshore deposits, than a scramble for the exits by panicked mainlanders.