China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings

Tyler Durden's picture

All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou (Where's Waldo) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the "buy US debt" Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that "end of QE" again?

From Xinhua:

China's foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

And as if the public sector making it all too clear what is about to happen was not enough, here is the private one as well:

China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

Tang's remarks echoed the stance of Zhou Xiaochuan, governor of China's central bank, who said on Monday that China's foreign exchange reserves "exceed our reasonable requirement" and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

The last sentence says it all. While China is certainly tired of recycling US Dollars, it still has no viable alternative, especially as long as its own currency is relegated to the C-grade of not even SDR-backing currencies. But that will all change very soon. Once the push for broad Chinese currency acceptance is in play, the CNY and the USD will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that US debt is no longer a viable investment opportunity. In fact, we are confident that the reval is a likely a key preceding step to any strategic decision vis-a-vis US FX exposure (read bond purchasing/selling intentions). As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt.

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Boscovius's picture

I'd make a mattress out of that shit and hide my silver under it.

nabi's picture

Hey, that's a good idea! :-)

surfersd's picture

Next OPEC will demand all payments in Euros. The Bear is ready to talk to Congress.

DoChenRollingBearing's picture

Just went and saw your Bear production surfersd.  Excellent!  Well done!

+ $122 (extra credit for Brent)

bulldung's picture

The Bear makes me laugh to tears,thanks.

mojine's picture

Put it on YouTube to get views.

Joseph Jones's picture

Isn't that when the average US citizen says we must annex Saudi Arabia and most of Opec?  Would the God-forsaken Al Saud family risk that? 

SmittyinLA's picture

In a month that same bag of shredded cash will cost you $90

MayIMommaDogFace2theBananaPatch's picture

If you have a really good credit score you can also get a large metal wheel to run on and if you're lucky some habitrail tubes to crawl through. 

The dream of homeownership-for-all is just taking on new forms. 

tired1's picture

Does this mke sense now?


Japanese pair arrested in Italy with US bonds worth $134 billion

Italian prosecutors were trying to establish yesterday whether US bonds with a face value of $134 billion seized from two alleged smugglers were real or counterfeit.


e_goldstein's picture

so a guy walks into a bar,

and says ouch.

Hremas's picture

Just read most of your blog there.

Much of it over my head. I am more of a trader, so when I talk of a deflation I am talking of a short term scare. Again.

My tendency to think of a near term deflation is due to the fact that, "the public is usually wrong". My impression is that the public expects inflation. My brother-in-law remarked to me some time back that "we need inflation". He is not a person who is investment/economics inclined. And the inflationist talk seems wild on the gold sites and ZH.

My brother in law probably represents the "popular demand" that you call the political will. However, in the shorter term the Tea Party and the gold/less govt. crowd is also a political fact. The Tea party mentality seems to have gained traction and will precipitate the next deflationary crisis. This make take a couple years or so to play out. In the meantime, the dollar may strengthen, the world economys may be slowed, natural resource prices may decline, etc...

It will probably be that the little gold buyers are flushed out, as usually happens in markets.

I have my physical. Land, silver, water and food. It is the desire to protect my saving/grow my savings that leads me to concentrate shorter term as a trader. For, as they say, in the long run we are all dead.

Good stuff on your site. trading megadroid

Creed's picture

 As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt.




Missiondweller's picture

Exactly. What would be the effect of everything at Walmart doubling in price because the products are made in China and China revalues the yuan/reminmbi?


Instant inflation during a period of high unemployment and stagnant wages. Result is massive stagflation.

OldTrooper's picture

What would the effect be of Wal-Mart abandoning the dollar for everything except its retail trade in the US?

Al Gorerhythm's picture

Isn't that gist of the story?

OldTrooper's picture

Not percisely what I got out of the story.  But it is a Sunday so maybe I'm not thinking as clearly as I'd like.  I was thinking about all of the other countries they do business in.  The implications for them in China are pretty clear, but that's not all of their business.

maximin thrax's picture

The effect of everything at WalMart doubling? Well, the useful crap can be made more profitably elsewhere, hopefully here in the US, inflating wages where wages need to be inflated, in the manufacturing sector. So that's just an opportunity to expand employment here.

Or, people forego purchasing the Chinese crap from WalMart and put that money instead into the tank because of rising gas prices. Then, China gets squeezed by deflation at the retail end and higher oil prices at the production end.

This nation can make just about whatever she needs, save petrolium (oil and refinement) at our current rate of consumption. And we don't buy oil from China. My biggest concern is maintaining the ability to give something of worth to the oil producers if we want to avoid a huge and very real shock to the economy.

Urban Redneck's picture

The EPA is trying to regulate farm dust and cow flatulence, and the IRS is trying to lay its hands on all the unencumbered cash it can.  The US will NOT be a destination for low cost manufacturing any time soon.  The Chinese have been outsourcing to Vietnam for years, but even Germany is a preferable location for manufacturing start-ups to the US.

FreedomGuy's picture

Actually, the Chinese and businesses in China are also moving farther inland away from the coast. Chinese workers get tired of one day off a month and low wages, too. So, to be competitive since China's advantage is primarily as a low cost/low wage producer they've had to move farther inland. This has a social benefit to keep everyone from migrating to the coast/s where the Western funded jobs are. Keeps their costs low and helps offset some of the inflation we are exporting to them. Ultimately, it is a losing game, though...or at least not static.

Don Keot's picture

Foreign oil is a huge hole in our bucket.  All of the money that goes to foreign oil does not come back.  It buys toys for the OPEC boys.

robobbob's picture

"doubling" a labor cost of twenty five cents an hour is still only fifty cents, and short an order of magnitude from making the US a beneficiary of that change.

maximin thrax's picture

China didn't eclipse the US in cell phone usage by paying everyone 25 cents an hour. There are as many Chinese enjoying a high standard of living as there are Americans (but a whole lot more poor, of course). They don't have much margin to trim outside of locating factories out of China into the next impoverished country. Besides, you have to factor in the cost of shipment from the other side of the world, which is oil dependent.

Great Dane's picture

...and riots from one ghetto to the next.

Troll Magnet's picture

what would be the result of everything at Walmart doubling in price?


expensive shit instead of cheap shit!  walmart would go bankrupt because no one would buy anything made in china if they had to pay more.  that will be a GREAT thing IMO.

Dr. Porkchop's picture

Nothing like paying high end prices for low end garbage.

Tail Dogging The Wag's picture

Have you expanded your overseas investments?

Do you have overseas investments like the Chinese?

Hugh G Rection's picture

Man this is bullish for the dollar!


Get your $100 USD calls while you still can! /sarc off.


wish i had more metal...

Josh Randall's picture

But, but, we flew Chinese flags in DC and on Pensylvaia Ave over the Capitol and everything! I thought they were our "Most Favored Nation" ?

Piranhanoia's picture

"Ben" may think "Ben" Franklin is his memorial, so he keeps printing them. He knows what they are going to be used for and is in favor.

bankonzhongguo's picture

China will convert all those dollars into political and resource influence in Africa and the ME.

The Spirit of Bandung marches on.

China should, like Bill Gross, simply state they won't buy UST anymore (no proxies either to juice the interest rate) and then proceed to settle all trading accounts by exporting their dollars back to America for exports and at least require the largest US importers (say Wal-mart) to settle their trading accounts in physical silver and gold.  Talk about a shock wave. Sure China's internal political culture  will eventually rip itself apart, but might as well sock it to the US.  As an artful boast, some PLA-N wonk should get some newztime and offer to trade $1 trillion in China held US debt for CVN 73.

Should the renaming be; Zheng He or The Bernak?

msamour's picture

That would mean instant nuclear war. If the power elites in the Westernized world feel cornered, I don't doubt for a second they will nuke the entire planet. They would do it because they are convinced they can get away with it.

sun tzu's picture

They would blow themselves up too. Nearly 40% of their exports go to America. If we don't buy their junk, their factories shut down and they have 50 million angry unemployed people living in their posh new cities.

Milestones's picture

A 40% across the board tariff and that would be 250-300 million unemployed and a whole lot of Pols hiding in the closet.    Milestones

bankonzhongguo's picture

Hey nobody saying the US won't buy China's crap.  The Chinese just say, 'settle the account in gold and silver instead of USD.'  This is the joy of fascism, when China, Inc. - which every thinks is so great - actually turns around and steals your IP and kicks you out of the market.

It doesn't matter what economic problems China has on the coast or inland, or now or 20 years.  They will just blame the US and everyone will assume its true.  Engagement.

And they don't need the US going forward.  They would just assume sell to Africa or develope the interior as the US.

In the end the US worker won't be much different than the Chinese one.

Dr. Kenneth Noisewater's picture

Meh, just pass a law that invalidates any debt held by nondemocratic regimes, picking a particular date to use for serial #s so they can't resell it.  Screw the Chinese AND the Saudis.

Al Gorerhythm's picture

What do you mean. You want to fuck them over again?

Teamtc321's picture

Think USA has high debt? Check out UK's 428% debt to GDP, Germany's 176%, Switzerland's 378%:  

r101958's picture

not sure where you are getting your figures.


sun tzu's picture

Your numbers are way off

tmosley's picture

Not sure how you can pull off such a feat without consigning the US to 3rd world status.

The US is the seated party in this particular scenario:

Joseph Jones's picture

I'm dumb and naive, I admit it.   Will your idea work?  It sounds good to me, except it's stealing?

mr66's picture

They need to kick can down road or we'll have major trouble.

Agent 440's picture

Man. They'll be bringing back all the COBOL dinosaurs to get the code to handle that many digits. Bastards will probably want their salaries paid in silver too.  : (

cindycheng's picture

I want to express my admiration of your writing skill and ability to make readers read from the beginning to the end. I would like to read newer posts and to share my thoughts with you. oilseed expeller

disabledvet's picture

I say we'll see the end of QE when we see Ben Bernanke do his Monday "press briefings" in his pair of Daisy Dukes.

Sudden Debt's picture

This 2 trillion cut is just the start of something worse!

First they cut the reserves and than they can savely revalue their currency, CAUSING HIGHER INFLATION IN THE WEST!


And Ben has a third problem: He can only print 200 billion for QE3. Anything higher will be a kick in the balls for the dollar above the rest of the troubles.

Unless Europe comes with even worse news (which I don't doubt) Euro 1 = Dollar 2. Which will kill european exports...

Endgame... we'll see who is prepared and who's not.


I'm prepared and I'm going to make a shitload of money out of this one! BOEYAH BITCHEZ!!