It's Official: China Is The "Mystery" Daily Buyer Of Billions Of Euros

Tyler Durden's picture

Over the past two weeks, we have been suggesting, tongue in cheekily, that despite the relentless desires of everyone to sell the EUR, it has continued to drift higher, due to some inexplicable force with bottomless pockets, which, after some deductive logic, we assumed was China. It turns out we were correct. Naturally, figuring out what China does with its $3 trillion in foreign reserves is sometimes more complex than brain surgery (except what it does every time it sees a barrel of oil for sale: then it is pretty much guaranteed what it will do). But when it comes to preserving its 3 rounds of horrendous European down payments, it was pretty logical that China would do everything in its power to prevent a waterfall effect that would result in Europe imploding in a ball of illiquid singularity. The WSJ has confirmed that China's SAFE is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. And while this does not mean the EUR is the new reserve currency, it certainly means that China has now become the deciding factor as to just who is (much to the chagrin of Markel, and delight of Geithner... for the time being).

From the WSJ:

China's deep pockets are momentarily keeping the euro supported.

But with Greece's financial future still uncertain even after lawmakers passed an austerity package on Wednesday, and the single currency's long-term prospects far from assured, Beijing risks learning a lesson about trying to fight a market more inclined to sell than buy.

For months, whispers of "Asian official buying" have permeated markets when the euro fell below certain levels. That talk has kept euro/dollar hemmed into a tight seven-cent range since late May, even as fears of a Greek default make traders disinclined to hold the single currency.

China, the world's biggest holder of foreign-exchange reserves, has pledged financial support to the distressed euro-zone periphery while touting its economic links to Europe.

And with the PBoC not having a bloated balance sheet, courtesy of trillions of Chinese bad debt being held off balance sheet, nobody dares to step in front of a train whose EUR buying capacity is, at least in theory, limited only by the notional amount of how much garbage America's gadget-addicted middle class will buy from a very mercantilist China. To wit:

There are perils to China's strategy, however. Most market observers agree that it is never a good idea to fight the market. Just ask the European Central Bank which spent months buying distressed periphery bonds to calm markets--only to have yields surge amid fears of a Greek default.

However, investors appear reluctant to go against China's vast economic resources.

China holds more than $3 trillion in foreign-exchange reserves, with an estimated 60% of those in dollars. Its strategy toward the beleaguered euro zone helps it accomplish two goals: expanding its global reach and satisfying the need to diversify its vast reserves.

Anyone who has followed the EURUSD on an intraday basis will be familiar with the following trading pattern:

"The market is inclined to sell the euro on rallies [whereas] China wants to buy it on dips," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "It maintains the current range-bound conditions until we get clarification on the long-term outcome for Greece."

How much EUR is China buying (and how many USD is it selling)? A lot.

Analysts point to official data showing that Chinese U.S. Treasurys holdings have fallen by at least $300 billion recently. Analysis of flows by Bank of America-Merrill Lynch shows that monetary authorities have been net sellers of dollars over the past four weeks, translating them into euros.

By looking at the rate of China's foreign-asset accumulation, Woolfolk estimates that authorities sell about $2 billion per trading session, with roughly a third converted into euros.

That dovetails with research by Douglas Borthwick, a managing director at currency broker Faros Trading.

Based on asset-allocation trends by the China Investment Corporation (CIC), he estimates the country could invest 500 billion euros ($722 billion) overall in Europe over five years, with 20% devoted to euro-zone peripheries. "That would buy a large amount of goodwill and lubricate other sensitive purchases throughout Europe," he said.

That doesn't mean China's largesse comes without limits.

And just as we have suggested before, the only thing that will prevent China from layering more money after bad, is a terminal event, which however China will do everything in its power to prevent by entwining the fate of Europe's banks with its own, as we suggested over the weekend.

Analysts see a remote but growing possibility of two worst-case scenarios. Greece dropping out of the euro, or fears about insolvency bringing the troubled economies of Spain, Ireland or Portugal to their knees.

If either of those come to pass, it may give China pause about throwing good money after bad.

The irony is that it is no longer the US which is pursuing a weak dollar, but its currency pegged partners, for whom a strong euro is just as critical important, China, that is doing all it can to boost US exports, which, however it knows, do not exist (aside from financial innovation of course).

The question now is: how long before Germany says it has had enough of China manipulating the European currency to a level that would almost make more sense for Germany to get out of the currency (which is costing the CDU and Merkel endless political credibility) and just return to the DEM. Alas, since Germany's banks are just as reliant on China as they are on the Fed, Merkel, or rather gher export sector, has now found itself between the Fed FX swap line Scylla and the Chinese mercantilist model charybdis.

Good luck with that Angela.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Max Hunter's picture

Amazing what aquiring the U.S. manufacturing base will do for your purchasing power.. Mystery solved boys...

dlmaniac's picture

As Peter Schiff puts it, "It just goes to show you how worthless treasuries are in their eyes that China would rather own PIIGS junk.'

Herbert_guthrie's picture

Once again, a moment of cognitive brilliance.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

I hear Gomer is going to be in on the September humanitarian ground invasion of Libya.

 

Tuco Benedicto Pacifico Juan Maria Ramirez

Rodent Freikorps's picture

You can call me blondie.

I know the name on the grave.

trav7777's picture

ahem...I was the one who suggested that China would become a surrogate dollar liquidity provider with their war chest.

They are undeniably in league with the FRB

Ghordius's picture

Listen to the words of THOSE WHO DO GOD'S WORK

http://www.youtube.com/watch?v=UpBfhhrsFXM

Some notes to this piece of modern gospel (all hail to the Great and Holy Squid)

- some good could come from crisis (hehehe)
- now it's the time for an EU Finance Ministry, even if it's unpopular in the UK (they will do as told)
- Policy Makers don't have any imagination (so GS has to step in)
- UK has to close the ranks with a Union of States (EU needs more centrality!)
- how can you have a monetary union if the single credits are treated differently (reminds you of CDO's?)
- why didn't they (stupid EU countries) agree to a common bond?
- surely Germany does not want it (the common bond) but they might have no choice (hehehe)
- Germany has some highly complex internal politics (we will find a way to get rid of those hurdles)
- time for an EU Finance Ministry, with someone with a powerful, influencing voice (of course a GS Alumni would be perfect, he can shop-talk with the next ECB head Draghi)
- then the screen blends the EUR Chart, with the title: "Some Nations Want Euro Weaker Than Dollar Parity" (EUR currently shown at 1.44, up 18%)
- then the screen blends in the subtitle: "Low Probability of Euro Break Up"
- China will soon be more important to Germany than all other partners

http://www.youtube.com/watch?v=UpBfhhrsFXM

Amen.

trav7777's picture

ahem...I was the one who suggested that China would become a surrogate dollar liquidity provider with their war chest.

They are undeniably in league with the FRB

falak pema's picture

They are caught in the web of their own previous rise as world factory over their double decade outsourced "miracle". The China strategy since QE-2 started is crystal clear; as I and others have pointed out here since January/february. They are now in a hotted up by FED currency war trying to protect the one region which is NOT directly pegged to dollar like THEY are : the Euro zone. Now they are in it full swing since the sovereign crisis makes US oligarchy schizophrenic play suicidal for the world economy. BB + Oligarchy markets (50 trillion sloshing around in corporates/oligarch/PDs off shore funds) have flooded the world with USD. China is now the white knight to bring the rest of the world out from USD hegemony, without killing off the USD. But their own economy is in overheat, as their muni situation is out of control. So prudence all around, the monetary war will kill all protagonists. Its a crazy race to the bottom right now...Who will throw in the towel first to call this game to close? Back to sanity and financial casino royal regulation.

Ghordius's picture

Tyler, I'm a great fan of ZH. It rocks. I sent some PayPal currency and suggest everyone to do the same, monthly.

I still disagree on "that despite the relentless desires of everyone to sell the EUR". Yes, Greeks are selling EUR (or hiding them under their bed) because they fear a forced conversion to a new Drachma. A lot of bad press in english speaking mass media has sparked a selling in many (english speaking) countries.

If you write "everyone" and you don't include the Eurozone, the Indians and the Chinese, then you are ignoring the same people that are buying gold at every freaking dip. OK, OK, the US is doing a lot in the field of physical silver (for historic reasons US & Chinese love silver, too). But face it, while the EUR/USD manipulations by the BigBoys are obvious, this "excluded from everyone peoples" are putting quite a lot of gold and euros on the side. It's the "saver" countries and they are trying to diversify their savings. Yes, it's mostly "common people" but it does have some impact.

Am I wrong?

Thanks trav7777, I usually don't understand what you are writing about, still, I love your icon.

CPL's picture

Buying IOU's, with IOU's, with more IOU's to promise payment later.

lookma's picture

That works as an explanation,as long as you don't look to closely.

There's gold there - that's why they are buying.

CPL's picture

You can't buy a kingdom...it's leased it until the next prince.

 

You know why you've never heard of an Irish Prince?  Cause they died 1300 years ago with the arrival of British sea pirates.  Want to see how long China hold's a position in europe without Oil in ten years.  About as long as the Mongols held Poland.

 

Not long.

i-dog's picture

"how long China hold's a position in europe"

That's not their end-game. TPTB's end-game is to merge a European Union with other Unions into a Grand Union (or NWO). China is merely helping to keep the European Union together for them until the merger (ie. after the fall of an independent US). Germany's export prices are irrelevant to China in that grander scheme.

Dugald's picture

Ah! but what will they take when they leave.....think on this.....The Beijing Louvre?

Maxter's picture

If I properly read the article, the goal of China is to make sure the western powers comes down with them if something bad is ever to happen to the chinese economy.  It looks like a remake of "mutualy assured destruction"

CPL's picture

China is already on the verge of implosion, power, or at least the illusion of it is much like holding a fist full of water to a thirsty man.  The only thing that is unending is the rage and thirst.   Eventually both wants die with the man.

 

China is grabbing at straws like everyone else and has oversold their own internal position.  If it sounds familiar stop me, the UK, US, EU oversold themselves to demographics.

 

As mentioned in other threads....if anyone is unde rthe age of 35 in any country I've listed. ...

 

DO NOT BE THE GREATER FOOL. 

 

If you are a youn person making good cash...that is you hold a job that pays, not a welfare POS...guess what?

 

YOU HAVE BARGAINING POWER.

 

Use it.  Save with it.  Invest with it.  (and right now I do not recommend stocks or equities of ANY kind.)

If anything...more of you and your friends you have rent bigger.  Cost equals smaller.  Do not squander your labour on some idiot stick's idea of this method of 'value'.

 

Keep renting...do...not...buy

Zeilschip's picture

In a high inflation environment, is it really better to rent than to own your own house?? Or only during staglation??

i-dog's picture

A house is never a 'great' investment ... a depreciating pile of idle resources sitting on an appreciating piece of land. Plus, in the present environment of desperate governments, that land (and all 'improvements' you paid for from after-tax dollars) is a sitting duck for ever increasing property taxes.

Rent what is appropriate for you at any point in time (no kids, young kids, teenagers with separate bedrooms/basement, kids gone, whatever) and invest in property only when it makes sense for the investment returns. I've only ever once [briefly] owned a place I lived in, but have owned plenty of others.

Freddie's picture

Does this mean I have to buy Sino Forest, and the other dog shit scam Chi Com stocks the SEC allows to list, in euros now on eTrade?

Re-Discovery's picture

Well well well.  My theory (previous post) might be wrong.  The dumbest guy in the room just put his dunce cap on.  Maybe China believes it will have better luck than the ECB or the Germans buying Greece or Ireland.  Good luck with that.

What is it about large asian economy central bankers that makes them think they can manipulate world currencies and win?  At least Japan stays focused on the Yen.  If this is not somehow coordinated with the Fed, it might be the dumbest currency move to date.

How does China have anything to gain from weakening the dollar?  And if the answer is diversification, then buy the ECB when it goes bankrupt.  Not now when the Euro is still historically far above its lowest trading levels.

 

 

 

 

 

Raynja's picture

China is making sure that anyone who might say no to them during the next five years won't.

This isn't an investment that they are making for a monetary return.  China wants to make sure when they make their next move (South China Sea?) that no one will dare to intervene.  'Throwing away' a trillion dollars for energy/commodity security/independence isn't really a loss.

CPL's picture

China has bigger problems and much like the US is involving itself in the game too late.  It's like watching a poor photocopy being copied from something that is known not to work.

 

What will freak people out is when the door slams shut and suddenly isolationism kicks in

 

 

CSA's picture

Doesn't isolationism fly in the face of a one world government?  I tend to agree with you, but that isn't the popular position with conspiracy theorists.  

 

Or is your sentence incomplete and really your saying isolationism kicks in... until the NWO?  That in turn would allow you to "fit in" with the masses who believe in the boogeyman.

Rynak's picture

CPL isn't your run-of-the-mill conspiracy theorist - and i'm quite happy about that.

MachoMan's picture

Simply put, the concept of a single world government is up against a more powerful force than god, rudimentary math.  While it is the goal of many world leaders, central banks, and the dogs that bark the loudest for table scraps, that goal will not succeed for some time.  I think it is inevitable as we become more economically intertwined, but it will likely be on a different playing field...  with different views and different rules from today... 

If small bands of countries cannot keep their unions together, then the macro is every bit as impotent.  The first rule of collusion is...  Thankfully, the same self interest that guides the consolidation of world power is also the same self interest that breeds self preservation when the plan comes unraveled.

PS, you have to admire the effort though...  it really has been a masterful play...  and still may work out to significant advantage for many of the principal actors...  just not on a world-wide scale (although micro stakes will eventually be utilized to leverage into world power).

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Bye, bye Taiwan!

 

Tuco Benedicto Pacifico Juan Maria Ramirez

Silver Dreamer's picture

Well, the oligarchs have to create that Asian Union after all, and I'm sure the Chinese are all for the idea!  What continually amazes me is that seemingly aware people continue to suggest the Chinese are acting alone.  They are not.  China is just another chess piece, just another puppet, and just another tool to further the global fascist agenda.

Re-Discovery's picture

I will grant you that something like this may be in their thinking as they have been so completely shunned from many international regimes dominated by US/Europe.

From a strictly financial standpoint, however, this should destroy the whole "weak dollar/ strong US equities" correlation, as this is an example of capital flight, not productivity.  If anything is ultimately a deflationary indicator for US-based Assets -- foremost among them USTs -- (unfortunately, commodity prices will be set by the world market), this is it.

 

 

 

 

trav7777's picture

ROTFL...yeah paper means so much.  Can't just print up paper

buzzsaw99's picture

The beauty of it is that euro bonds are guaranteed by the bernank.

sabra1's picture

looks like they're buying more euros tonite!

buzzsaw99's picture

and dumping usa t-bonds? sweet!

Cognitive Dissonance's picture

Looks like they couldn't eat just one. Poor bastards, they're hooked now. Might as well admit defeat and just set up an IV to mainline the stuff. Watch out for that initial rush though. Wow, now that's what I'm talking about.

I tried to warn them that the $USD was a gateway drug, but do you think they would listen to me. Nooooooo.

unum mountaineer's picture

tyler, understood. but whats this here aug. 4th date all about. magical? pray tell..

Jack Napier's picture

August 3rd is when the US debt ceiling needs to be raised by in order not to default. That is unless they do payment prioritization which is supposedly off the table. I'm pretty sure there's an article here about it somewhere. Don't worry. They'll raise the ceiling, keep on spending, the can will be kicked and kicked until the shoe is worn.

CSA's picture

Pick a date, any man made economical doomsday date you like.  After it passes, the sun will continue to rise and the people will continue to exist.

 

The biggest hoax of all is to think our life will be vastly different Sep. 1st from the way it was Aug. 1st if the debt limit isn't raised.  Call me a glutton for punishment, but don't raise the debt ceiling and see what happens.  Nothing... we shed a few jobs, cut our spending significantly, private sector eventually (several years) picks up the slack, and we're the stronger for having gone through it.

Cdad's picture

The Chinese are the worst capital allocators on the earth.  Since China appears to be done buying our debt [which is great IMO], the economic war that China has perpetrated upon the US should be engaged immediately.

Start the trade war already, and commence selling ridiculous rips on the Euro...selling straight into Chinese stupidity.

sabra1's picture

China on Wednesday reiterated that it has “indisputable sovereignty” over islands in the South China Sea after the United States pledged to help the Philippines, which has its own claims in the area.

A spokesman for China’s Taiwan Affairs Office, Yang Yi, also repeated the government position that safeguarding the sovereignty of the area’s potentially resource-rich islets was a “common responsibility” for Beijing and Taipei.

“China has indisputable sovereignty over the South China Sea islands and their surrounding waters,” Yang told reporters, according to an official transcript.

China, the Philippines, Vietnam, Brunei, Malaysia and Taiwan have overlapping claims to parts of the South China Sea, which is believed to have vast oil and gas deposits, while its shipping lanes are vital for global trade.

 

 

CPL's picture

I couldn't agree more.  It's like watching the middle east buy everything in sight during the Carter years.  This is going to end on the same note.

 

Everyone is going to be pissed.

Cognitive Dissonance's picture

So does that mean we'll Stuxnet their nuclear reactors next?

Just asking in case we need to evacuate Banzai7 in a hurry.

http://en.wikipedia.org/wiki/Stuxnet

WB7, I've got a mother-in-law apartment you're welcome to.....if you're able to get my mother-in-law out of there.

Cdad's picture

Umm...yes, I think we are still in pretty good with that particular contractor.

However, the only weapons we really need are tariffs.  

Cognitive Dissonance's picture

Cdad is old school.....bitches. :>)

Yen Cross's picture

  Cdad has his game on. Keep ass slaping em Cdad!   Yen.

Zeilschip's picture

Selling euro's and ... buying dollars?? Let's wait and see what the more stupid trade is. I honestly don't know right now.