The level of Chinese bank reserves fell again in May 2018. Year-over-year, what is technically classified as Deposits of Other Depository Corporations on the PBOC’s liability (money) side of its balance sheet contracted by 1%. This advances a very different trend for reserves, breaking what had been a more continuous and determined effort toward at least minimal growth.

The central bank’s asset side persists in shrinking as China’s monetary authority has not been able to gain any new forex reserves. This despite the fact that CNY has (had) been able to significantly retrace its prior devastating decline. Without forex growth, the PBOC can only “print” RMB via its various window programs like the MLF and others in order to maintain some growth on the liability side.

The contraction now in bank reserves isn’t a surprise, at least not to us. It’s a development we’ve been tracking for two months (a more detailed explanation can be found there). I wrote last month:

To briefly review, China has a currency problem first and foremost; CNY DOWN = BAD. Chinese officials have tried everything to arrest the issue or have at times attempted to alleviate its worst tendencies. It appears as if they had early last year (after CNY continued falling even as “reflation” gripped almost every other place, especially around the EM world) settled on a stable CNY at all costs.

But that would have meant ending the remarkable RMB “printing” the PBOC had undertaken so as to keep its own asset side rising enough to produce positive bank reserve growth. It placed the central bank in quite the conundrum.

Banks did repay on the MLF in April, but not again in May. The PBOC’s asset item encompassing interbank borrowing gained some back last month, somewhat against the stated purpose. It’s not easy to tell why that may have been, since there are several technical and regular factors that are, to be frank, quite impossible to distinguish from what officials are clearly trying to do here.