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China’s Foreign Exchange reserves fell by USD27bn in February, the first monthly decline since January 2017. The reaction from the market has been to see as a valulation event rather than as a reflection of capital outflows.

Yuan Printing

With the Yuan generally strong over the past year and China's very strict capital control measures capital outflows have not been seen as the rationale.  China’s authorities explained  the decline was partially due to a valuation effect because of mark-to-market losses. With that being said forex reserves dynamics will have little impact on CNY exchange rates, unless it is lasting or major outside event.

It is always difficult to interpret China’s trade data in January and February because of the Chinese New Year. In February, China’s export surged by 44.5% y/y in USD terms, which like many of official Chinese economic releases sounds unbelievable. March and April will give us a truer picture, though what will China's reaction to the newly imposed trade tariffs on steel and aluminum?

The extremely high headline export growth could exaggerate the trade war fears, and give political players ammunition. More tweets from Mr Trump on trade deficits with China. What about our favorite outside risk of shadow banking in all this?

From a sunburnt country ...

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