More Thoughts on China's Reserve

Yesterday China reported its reserves figures. In my note I mis-represented the increase in reserves. Chinese figures show the reserves jumped a massive $194 bln. This a huge number.

The trade surplus is Q3 was about $65 bln. Can the rest be hot money, direct investment flows being neutralized, and extra efforts to restrain the CNY's rise? One of the critical points we make when look at reserve figures is that there is a valuation component that is often significant but just as often overlooked by analysts as well as the media. China is one of the few countries that is highly secretive about their reserve allocation. However, an official let slip, perhaps in an effort to play down the significance of the jump in reserves, that $80 bln was due to the euro's appreciation.

From this information, and making a simply assumption that China has only dollars and euros in reserves, the valuation increase would suggest that China has about $730 bln worth of euros or a mix of roughly 70% dollars and 30% euros. The market has assumed that the dollar's share is closer to 65%. If we modify our assumption that China has diversified is reserves slightly into currencies, like Japanese yen, British pounds, Australian dollars, Canadian dollars and maybe even South Korean won, today's official comment would generally confirm market assumptions about the currency allocation of China's reserves.