Research Team at Goldman Sachs, notes that the PBOC’s FX reserves decreased US$99bn to US$3.23tn in January (Bloomberg consensus: -$118bn; December: -$108bn). Key Quotes “After adjusting for estimated currency valuation effects, the fall in reserves may have been about US$89bn (vs. estimated -$130bn in December). As has been the case in the last few months, additional SAFE and PBOC data, likely to be released in the next two weeks, should give useful supplemental information regarding the underlying flow situation. We estimate that currency valuation effects could amount to around -US$10bn (assuming the currency composition of China’s FX reserves is similar to that of the global average), and therefore sales of FX reserves might have been about US$89bn in January (vs. estimated $130bn in December). The continued rapid loss in FX reserves suggests that FX outflow remained at a rapid pace. As we have discussed previously, however, headline FX reserve data do not necessarily give a comprehensive picture on the underlying trend of FX-RMB conversion by corporates and households. This is not related to any accuracy issues of reserve data, but is due to the fact that valuation effects are uncertain and that other non-PBOC financial institutions may also use their (spot) balance sheet to absorb underlying flow pressures. Correspondingly, the PBOC or related entities may have accumulated forward positions that do not affect reserves immediately. In our view, a preferred gauge of the FX-RMB conversion trend amongst onshore non-banks would be based on SAFE data on banks’ FX settlements on behalf of their onshore clients. That report captures banks’ FX transactions vis-à-vis non-banks through both spot and forward transactions, and will be out on February 23. Data on the positions of FX purchases by the banking system should also shed useful additional light, and are likely to be released around middle of the month.” For more information, read our latest forex news.