Dollar Hoarding Explains Some of Forex Outflows

Economist: Flow dynamics

That China’s foreign-exchange reserves have still fallen is evidence that even more money has left through other channels. Straight arithmetic implies some $600 billion in outflows. This, however, is a gross simplification. A strong dollar exaggerates the fall in reserves, by devaluing assets in other currencies held by the central bank.

Moreover, much of what has been recorded as outflows under the capital account is not “hot money” of the kind passing surreptitiously through Macau. Many companies have simply chosen to hold onto foreign earnings in their Chinese bank accounts, rather than rushing to convert them as they did in the past, when yuan appreciation was a one-way bet. Accounting for this, Larry Hu of Macquarie Securities calculates that China’s true capital outflows are less than half their implied volume, and less than its trade earnings. This, he drily notes, is not what a balance-of-payments crisis looks like.