1 September 2015
1 September 2015
Special Report: The treat Accumulation' Is Over: FX Reserves Have Peaked. Beware OT
'Figure 5: Posi-onsis, Chinese reserve volatility dnven by
financial rather than current account
Current Account. Chins
MIF•ancea Account
—Change n Reserves IFX-adjusied 700
600
500
400
300
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300
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financial Account
Chinge rn Reserves (FX-adented1 IFigure 6: Other alvestment 3C(XX1111 capture:
land he flows
USD to DEM Current Account China
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While the aggregate masks considerable country-level variance, the broad trend in
the rest of EM Asia has been similar to China. Pre-crisis, reserves stemmed from
current account surpluses, with financial flows playing a negligible role (Figure 7).
That changed after 2008 as massive financial inflows during 2009-10 filled central
banks' buffer stocks at a rate far exceeding the pre-crisis run rate. Net capital
inflows dried up in 2012-13, however, before turning sharply negative after the
taper tantrum. Along with this, the pace of reserves accumulation also fell sharply.
Indeed, the shifts in portfolio and other investment flows are most closely
correlated with reserves changes (Figure 8). Interestingly, rising current account
surpluses have given reserves in North Asia a helping hand again.
Outside Asia, EM reserve accumulation has been even more reliant on capital
flows. With the major accumulators in Latam and EMEA running current account
deficits, excess financial inflows have been the backbone of reserves. Reserves
growth has slowed here because financial inflows have not been able to keep
pace with widening current account deficits (Figure 9). The data does not fully
reflect the acceleration in this dynamic in the past months. Yet it bears testament
to the worrying pattern for the non-Asian EM bloc to be highly vulnerable to
reversals in hot money flows (Figure 10).
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