China’s formal foreign exchange reserves rose by about $40 billion in the fourth quarter, rising from $1906 billion to $1946 billion. Adjusted for valuation changes, that works to a $55 billion or so increase. But appearances can be deceiving.

In the past, China “hid” the pace of increase in its reserves by forcing the banks to hold dollars as part of their required reserves. Those dollars showed up on the PBoC’s balance sheet as “other foreign assets” but weren’t counted as part of China’s formal reserves. In the fourth quarter, China’s reported reserves overstate its true reserve growth, as the banks reserve requirement was cut. That led to a $26 billion fall in the PBoC’s other foreign assets in October and, I assume, a comparable fall in December. Given the size of the reduction in the reserve requirement in December, that is conservative.*

That means that the PBoC’s “true” reserves didn’t grow at all in the fourth quarter, best I can tell.

Valuation changes had a fairly modest impact on the data for the quarter as a whole, but a huge impact on the data for individual months. They pulled reserves down in October and pushed reserves up in December. Both effects were quite significant – in the $50 billion range. That has one big implication: China was adding to its reserves (if reserves are defined broadly to capture the PBoC’s other foreign assets) in October but not in December. My best guess is that China added about $15-20 billion to its reserves in October, another $10 billion in November and lost $20 billion in December. My numbers are a bit different than those of Morgan Stanley’s Wang Qing. He believs capital outflows peaked in October. I would put the peak in December — which incidentally implies that the small RMB devaluation that China tried in early December had a big impact on capital flows.

I wouldn’t put too much emphasis on the monthly estimates though. Combine China’s huge reserves and large moves in the currency markets and you get large valuation changes. If my estimate of the currency composition of China’s reserves is off, my monthly estimates will be a bit off too. The trend though is clear. Chinese reserve growth looks to have peaked earlier this year.* On a rolling 3m basis (adjusting for valuation changes and likely changes in the PBoC’s other foreign assets), Chinese reserve growth has essentially stopped.

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I’ll be unusually brief. I have been working through the latest data on China — and, well, it is hard to top Calculated Risk.

The fall in the US trade deficit today was easy to anticipate. The average price of imported oil was sure to fall from $92 in October. It came down to $67 a barrel in November. The petrol deficit fell by about $13 billion.

That wasn’t all though. The non-petrol goods deficit also fell by about $4 billion. Y/y non-petrol goods imports were down 9.3% (they were down about 1% in October); y/y non petrol goods exports were down 4.4% in November. They were up 2.4% in November. So long as non-petrol imports fall faster than non-petrol exports, the US deficit will shrink.

This shows up in clearly in a plot — prepared by Arpana Pandey — of real goods imports and exports. In November the down turn in imports was sharper than the downturn in exports.

There isn’t anything good in this graph other than the fall in the trade deficit. Falls in exports and imports signal contracting global activity. And I am not even sure that the improvement in the trade balance will continue, as I suspect the combination of a stronger dollar and a broadening global slowdown will eventually have a major impact on exports — and the US fiscal stimulus will bleed into imports. But the US led the world down and for now, US imports are falling faster than US exports …