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RMB: Growing twin surplus – Deutsche Bank

Earlier this month, SAFE released the preliminary 3Q Balance of Payments (BoP), which shows net inflows into China for the second consecutive quarter, points out Perry Kojodjojo, Strategist at Deutsche Bank.

Key Quotes

“Although the 3Q BoP surplus of $29.9bn is marginally smaller than the prior quarter ($31.6bn), we believe the ongoing stability in growth and the RMB should lead to further improvements in flow dynamics. Furthermore, into 2018 the ongoing improvement in flow should result in China recording a larger twin BoP surplus again.”

“Looking at the breakdown, we make two observations:

  • Narrowing of current account surplus likely to be temporary. The current account surplus narrowed to $37bn in 3Q, from $51bn in 2Q, driven by: (1) large income outflows due to dividend payments and (2) a smaller trade balance on the back of strong import growth. However, with the dividend payment season over and the trade account set to improve seasonally in 4Q, we believe the current account surplus should expand again.
  • Notable improvement in financial account (which includes Error and Omission, E&O). The financial account improved for a fifth consecutive quarter, due, we think, to a combination of macro-prudential measures introduced by the authorities in recent years and ongoing RMB strength. Looking back, the narrowing of the deficit started with a slowdown in USD repayments by corporates, followed by a slowdown in ODI due to regulatory changes. In our view, the stability of both the currency and economy has likely now led to a slowdown in illegal underground outflows, resulting in a smaller E&O and an increase in currency and deposit inflows, which is categorize in the “other investment” component of the BoP. After delaying FX conversion for a prolonged period, we believe the increase of the currency and deposits outflows had been due to corporates holding FX proceeds in overseas banks due to worries of RMB weakness. However, with expectation of CNY depreciation receding, these flows are returning and on the BoP show inflows on this account. If this persists, we believe China's twin surplus will widen further and result in a bigger BoP surplus (~$100-150bn), particularly if portfolio inflows continue to pick up (Figure 3), adding to RMB appreciation.”

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