EFTA01458287

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 700 600 500 400 300 200 TOO 0 -WO 2002 2004 2006 2008 2010 2012 2014 on I,• 'kat* vNv130.• errs. sVf. HowN Anatolys. C£C r,. -iguie 7 in the rest Asla. big post4A1 linens tan inflows I haV0 turned to outtlowz 400 300 200 100 0 1. skill • a a• Rw -100 uS0 *Current Account. EM Asia ex-China financial Account Chinge rn Reserves (FX-adented1 I Figure 6: Other alvestment 3C(XX1111 capture: land he flows USD to DEM Current Account China Chong. In Rezentes(FX.achusteci, 700 1 -Other inveezeren! —F01 . Portfci ,i 100 •100 ,300 .1 2002 • • • / I 0 , I , \ Pi 2004 2006 2006 2010 2012 2014 Soot* Au sroor Gant MI ton InattIs. car [Figure 6: which has beer 6 combination of. porttolio and 'other investment exit? USD bn 400 300 ; 200 I 00 0 -100 mu Current Account, EM Asia ex-Chna (Tarp, in Reserves fFkacIusleca ----Portfolo + other awestrntot ; \V; • • 1 ••• % \t Iv.. se, %•••• -200 2002 2004 2006 2008 2010 2012 2014 2002 2000 2006 2006 2010 2012 2014 • Off Nocche Rrr. IMO .10/.1 St -)r1 .€2.2r1 )1 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). Page 4 Deutsche Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0118136 CONFIDENTIAL SDNY_GM_00264320 EFTA01458287