How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable

Tyler Durden's picture

While the topic of China's slowing economy has been a prominent fixture over the past week, first with the latest Chinese rate cut last weekend, followed by the announcement that China is once again lowering it target growth rate to 7% for the 2015 and onward, coupled with a warning that "downward pressure is growing" and that 2015 will be more difficult for the country than 2014, the one issue that has not gotten the attention it deserves is capital flight out of China, now that deflation is increasingly mentioned as an outright possibility for the country, and the reasons behind it.

As a reminder, China is increasingly impacted by the Fed's policies as a result of two things: weaker currencies around the globe, coupled with China's quasi-peg to the USD, which over the past week has soared to fresh 13 year highs on expectations that the Fed will hike this summer (further validated by today's jobs report which miraculously was not impaired by the second, and worse, Polar Vortex, thus destroying the narrative made so popular last year that cold weather in the winter is responsible for weak job reports). Needless to say, for a country which just posted its record trade surplus, and whose net exports are still the lifeblood of the economy, being pegged to the world's strongest currency has two consequences: concerns about imported deflation which will lead to even further economic slowdonw, and capital flight as faith in the Chinese Renminbi is increasingly shaken.

The WSJ touched on just this critical topic in mid-February when it reported that "Despite a record trade surplus and a steady inflow of investment capital, China’s banks posted net sales of foreign exchange in January, suggesting that capital was flowing out of the country during the month."

The WSJ continued:

Analysts said the foreign-exchange data, released Tuesday by the central bank, partly reflected declining confidence in the nation’s currency amid a slowdown in the economy, as exporters and individuals held on to foreign exchange rather than convert it into yuan.


They also said it was yet another signal the People’s Bank of China would need to offset the loss of those funds by reducing the percentage of deposits that banks must park with the central bank in case of financial trouble.

As was further explained, while the foreign-exchange data also include figures from commercial banks and other financial institutions, they mostly reflect purchases and sales by the central bank. The figure is seen as a rough guide to changes in domestic liquidity conditions.

Not helping things is the recent weakness in the Yuan, which as shown in the chart below, has recently tumbled to multi-year lows:


The WSJ's take: "The yuan’s weakness against the U.S. dollar of late has made many companies and individuals reluctant to convert their foreign funds into local currency. The yuan lost 2.5% against the increasingly robust U.S. dollar last year and another 0.8% this year."

But the biggest reason for the slide in the Yuan is that banks "have seen rising levels of foreign-currency deposits, and that is a sign that exporters and individuals are “not confident in the outlook for their own currency and don’t want to hold on to it."  said Dariusz Kowalczyk, an economist at Crédit Agricole in Hong Kong. He said he sees this as the key factor in the net foreign-exchange sales data. Mr. Kowalczyk said the market is looking for the yuan to fall further to 6.35 or 6.40 to the U.S. dollar from the 6.25 level it traded at Tuesday morning.

It is slowly getting there.

Fast forward to today, when overnight Barclays observed more of the same theme. In a report titled "Unprecedented surge in FX deposits", Barclays notes that the recent "Unprecedented surge" in FX deposits is reflective of growing expectations of CNY weakness vs the USD. It adds:

The latest banking statistics from the PBoC suggest a further increase in market concerns about the risk of CNY depreciation this year. According to the PBoC press release on banking statistics, total FX deposits in China surged by USD45.2bn in January 2015 to a total of USD655.7bn (comparatively, the increase for the whole of 2014 was USD108.4bn). While we have become aware that PBoC has made some methodological changes to banking deposits starting in 2015, the increase in January of USD45.2bn still marks a very large monthly increase in FX deposits compared with the historical series. This compares with a q/q decline of USD31.8bn in FX deposits in Q4 14, and we think the January increase cannot be fully explained by seasonal factors. Such a renewed jump in FX deposits is significant, in our view, and reflects the degree of FX pressure that has developed over recent months.

This is how said "surge" looked like:


That is not to say that the PBOC is doing nothing. Quite the contrary:

A separate and more closely watched data series – the change in financial institutions’ (FI) position for FX purchases – suggests that the PBoC has continued to intervene in the FX market to limit currency weakness as CNY fell towards the weak side of its trading band. As shown in Figure 3, FIs’ position for FX purchases fell again in January, dropping USD17.4bn following a decline of USD19.1bn in December. We believe this can be largely attributed to the PBoC’s FX intervention activity, even though data on the PBoC’s foreign assets/FX reserves have not been released.

Behold the PBOC's alleged intervention:


Barclays, like everyone else suddenly, is pessimistic about the prospects of a quick CNY jump. In fact, if anything, it took is shifting to a "controlled devaluation" camp, saying "Negative market sentiment on CNY may not abate quickly."

The renewed rise in FX deposits highlights the increasing currency pressures and the ongoing monetary dilemma that China is facing. Even though the authorities have kept USDCNY fixings broadly stable and have attempted to tame market expectations of policy changes through public comments, these efforts have failed to calm market expectations of CNY depreciation. This is reflected by a number of factors, including the rise in FX deposits, offshore USDCNH trading above the upper bound of the onshore USDCNY trading band, and the extreme skew in risk reversals in the FX options market. We do not see these factors abating? indeed, we expect USDCNH to continue to trade above USDCNY, with the risk that the basis will widen further."

The punchline: devaluation may be imminent:

As the USD has risen against global currencies, the market has likely become more concerned that China eventually will have to allow more CNY weakness versus the USD in order to tame REER appreciation. As we argued in CNY: Deflation, downturn and the deepening monetary dilemma, 12 February, amid slowing inflation and rising outflows, the costs of limiting CNY weakness are growing – including the unintended effect of placing more stress on CNY market liquidity and interest rates, rendering liquidity easing efforts less effective.

Which means the PBOC's recent easing will do absolutely nothing to offset not only the ongoing surge in the USD, but the near historic collapse in the EUR, one of China's main trading partners. As a result China will be swamped be exported deflation not only out of Japan, as has been the case since the start of Abenomics, but now, thanks to Q€, from Europe as well.

And yet, the paradox is that China is caught between a rock and a hard place: devalue too much, and the capital outflows will accelerate, not devalue enough, and the mercantilist economy gets it:

... the recent surge in capital outflows probably means that Chinese authorities have become even more cautious about fuelling CNY depreciation expectations in the near term. Indeed, China typically has refrained from making policy adjustments when selling pressures on the CNY are heaviest. This may preclude an imminent band widening, but we do not rule out the authorities undertaking policy adjustments when CNY selling pressures subside. In the meantime, the path of least resistance is to move USDCNY fixings higher.


Supporting our view that a band widening is likely, even if not imminent, is the fact that Premier Li mentioned in the opening speech of the National People’s Congress (NPC) that the government would allow the RMB exchange rate to “float more freely”. It is important to note that the phrases on “increasing flexibility/expanding the floating range” are not mentioned at every NPC speech. Interestingly, these phrases were included in the NPC speeches of 2012 and 2014, years during which China allowed the trading band to be widened.

What all of the above means is that China is suddenly finding itself in an unprecedented position: it is losing the global currency war, and in a "zero-sum trade" world, in which global commerce and trade is slowly (at first) declining, and in which everyone is desperate to preserve or grow their piece of the pie through currency devaluation, China has almost no options.

Well, that's not true. Because if China wants to enter the global currency wars, and it will soon have no choice, it has - according to Cornerstone - several options with which to stabilize its economy, but really all of which, due to the size of China's epic credit and investment bubbles, and keep in mind that China's housing bubble has not only burst, but is now deflating at a faster pace than what happened in the US after Lehman...

... boil down to just one: QE.

From Cornerstone:

Do you remember that from 2007 to late 2008, U.S. fed funds dropped 500 bp, and then the Fed still needed to do QE? The backdrop for China looks a bit similar. We had a credit bubble, they have a credit bubble. We had a housing bubble, they have a housing/investment bubble. Will China eventually have to go down the same path as the U.S., and the Eurozone? Roberto Perli believes the PBoC will first cut rates to 0%, before contemplating QE.

There you have it: the flowchart for what is in store for the world for the next 12-24 months - an ongoing deterioration in Chinese economic conditions, coupled with a weaker, but not weak enough, currency, before the PBOC first go to ZIRP, and then engages in outright QE.

And once China, that final quasi-Western nation, proceeds to engage in outright monetization of its debt, then and only then will the terminal phase of the global currency wars start: a phase which will, because global economic growth and that all important lifeblood of a globalized economy - trade - at that point will be zero if not negatve, will see an unprecedented crescendo of money printing by absolutely everyone, before coordinated devaluations mutate into uncoordinated, and when central bank actions morph from "all for one" to "each man for himself."

At that moment, what had been merely currency "war" will finally transform into a shooting one.

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Crawdaddy's picture

What are these bubbles you speak of? Are they like the so-called chemtrails?

MarketAnarchist's picture

....... Or China could peg its currency to gold along with Russia and Switzerland.


Then they could look the west straight in the eye and say



luckylongshot's picture

It is a big mistake to look at China and assume the same rules apply as apply in the west. China owns its central bank and that means it has a whole range of options that the west does not have. It can write off debt. It can and has given a 60% payrise to bureaucrates to increase demand. It can issue interest free money to fund infrastructure projects, it can execute banksters, it can and has raised pensions 900% over 11 years. The point is that QE has shown it does not work in raising demand and so is ineffective aginst deflation and so the chances of China doing western style QE are zero.

Self-enslavement's picture
Self-enslavement (not verified) luckylongshot Mar 7, 2015 1:21 AM

We can all only hope they are using the money to build bombs that they will launch at Israel.

Why else would anyone print money, to buy Apple stock?

You have to be fucking kidding me right?

old naughty's picture

the answer is "yes", resoundingly...

with more lives at stake.

Self-enslavement's picture
Self-enslavement (not verified) old naughty Mar 7, 2015 8:13 AM

The entire planet is at stake here. Jewish control of the worlds "governments" is a real and irreversible threat.

cnmcdee's picture

Central bank interest rates will determine the growth rate of the saver and the contraction rate of the borrower.



Exponere Mendaces's picture

@luckylongshot, I think you're right but not for the reason you state - their partnership with Russia is going to be part of the safety net once the EU crumbles and the USA continues to slide into third-world status.

China also has a record of letting bad bets fail, whether its a private bank or a construction company. They also jail CEO's who they view as corrupt, a practice the USA should emulate but doesn't have the balls to do so.

When the dust clears, China and Russia will be fine, the rest of the world will be wallowing in the "new normal" of currency devaluation and credit crisis.


gwiss's picture

China's economy is still dependent on exports, and the exports aren't things that are vital.  Russia could do the precious metals move, because if push comes to shove, countries will do whatever they have to and pay whatever they have to in order to get energy.  On the other hand, countries won't do whatever they have to in order to get manufactured goods.  

Russia, with its low debt, can move to a commodity money without too much pain.  China, whose growth has been entirely dependent on a credit binge that makes the credit expansion of all other countries look like mormons in Vegas, has really grabbed a tiger by the tail, because they are reaching debt saturation, meaning that even though they are trying to buy GDP growth with debt, they are now borrowing multiples of the growth they are able to achieve.  Macau casinos, a proxy for how rich the Chinese elite feel, are on course for revenues to crash 53% this year.  Now, they say this is due to Xi's crackdown on money laundering and corruption, but when combined with the crash in the Baltic index shipping that moves Chinese goods throughout the world, and a once red-hot Chinese property market that is currently collapsing faster than our housing bubble did post Lehman, I'd say they are peeking over the abyss and quietly pissing in their shoes.  1.3 billion people were promised a ticket to the living standards of the west, and they are not going to quietly trudge back to their peasant villages without a fight.


Despite their deep and ancient appreciation for the true nature of wealth, their politicians have been snookered by the same confusion about the nature of growth fueled by debt that all advanced economies have been.  They are just now beginning to understand that when you move demand forward from the future using debt you can temporarily achieve above average growth, but it can only be paid for by a prolonged period of below average economic activity.  And below average economic activity is not going to cut it for China's leaders because it is not going to cut it for the Chinese people.  

So, watch Taiwan and Japan.  China will need a distraction and a scapegoat as their economic rocket engine starts to melt, and blaming economic austerity on war is always more politically palatable than blaming it on fucking bonehead political choices.  And politicians are the same no matter what flag they crawl under -- goddamn lying pussies willing to ass fuck their own grandmothers in order to hang onto the power and fame they can't live without.

napper's picture

Not even close.


Change "China" to "the US" and "export" to "money printing", you might have a much better case.


China's Real estate market is not collapsing, despite central government's repeated attempts to rein in speculations. China is no more dependent on exports than its trading partners dependent on imports, especially the US. China is dependent on energy imports only.


There is a financial and economic warfare going on in the world on top of military conflicts the US has started in Europe, Africa, and the Middle East. The NATO crime syndicate is losing ... hence the escalation of rhetorics from puppets in Washington and London.


You seem to have been getting your news from the mainstream media.

80 years are up's picture

I fear that the last paragraph is totally true.  The older I get the more I see it. Watching the current crop of politial "leaders" is tough to stomach.  We will live in interesting times. 

post turtle saver's picture

if it's so easy why haven't they done it?

I'm going to keep asking this very simple question to anyone who keeps stating "oh, it's magical, Russia/China/etc just pegs their currency to gold and is instantly entitled to running the world as a result"

because it's pretty fucking obvious the world doesn't work that way

Money_for_Nothing's picture

China and all the rest want to duplicate USA 1942-1965. Build the mightiest mercantile empire in the world. Won't happen on a gold standard. The world wants to do to the USA what the world did to China 1900-1930.

blindfaith's picture

let them eat cake

Brazen Heist's picture

Central bank balance sheets:

The question is how will they go about unwinding their swelled up asset purchases i.e. bonds on their books, and return the market back towards normalcy? 




TheReplacement's picture

Argh.  There be monsters here-ra.

Dubaibanker's picture

China GDP: USD 10 trillion.....US GDP USD 18 trillion.

China positive cash reserves: USD 3.8 trillion....US DEBT (negative): USD 18 trillion

China bail outs: Almost none or maybe USD 1 trillion over last 10 years...US bailouts: Over USD 10 trillion in the last 10 years.

China population: 1.36 billion....US population: 350m.

China, number of banks in Top 10: 4....US, number of banks in Top 10: 1.

With a population of 350m, US has Fed balance sheet at $4.4 trillion. Why cannot China, with 4 times larger population at 1.36bn have PBOC balance sheet of $5.5 trillion? In my view, it could go higher without any devastating affect. Let us talk ratios and not absolute numbers which are irrelevant. When will economists learn? Answer: Never!

China: keeps buying assets like Thomas Cook, Manhattan buildings, JPM HQ, Rosewood hotels, Heathrow airport, Spanish clubs, Canadian and other oil companies, Motorola, IBM, Volvo, Peugeot, AMC theatres, alfaalfa farms, real estate around the world in every single city etc. i.e. ALL REAL PRODUCTIVE ASSETS.

In comparison, US keeps fighting wars in Ukraine, Libya, Iraq, Afghanistan, Pakistan, Yemen, Syria.......

What does US have to show for its debt?

China too can create this debt but then we would all be asked to learn Mandarin like we had to learn English due to US hegemony in all spheres of our lives. The time is coming to learn Mandarin!

And, why is it bad when China creates debt for its self interest and not bad for US or EU or Japan?

Note - all numbers above are approximations.

napper's picture

US GDP is nowhere near 18 Trillion.


Not sure about China's GDP, but if the reported value is 10 Trillion, then chances are it's more than that.


Above all, GDP is NOT necessarily a good, much less an accurate, measure of a country's health and power.

Dubaibanker's picture

It was an inaccurate approximation. US GDP is at USD 16.8 trillion.

China is at USD 9.2 as of few months ago.

On PPP, China is much higher.

Agree on the health and power perspective.

But just using one data point to make an observation on debt.

napper's picture

I know what you mean. I am saying that the way the US government (if it can be called one) calculates the GDP has been highly fraudulent over the years. Wall St is not alone when it comes to false accounting.

cnmcdee's picture

It's a really good point I have 50% of my economy working for the government producing paper to process paper all making 50% of the GDP but producing nothing.  So what is my real value GDP? Ans : Half!

Or I have 40% of GDP going to pay people on every government service imaginable - what is my real GDP - lop off 40%!

tarabel's picture



China rose on the back of technology transfers from the West. Given that all of its customers economies are stagnant and that multi-nationals have gotten wise to the Chinese theft of intellectual property, China has already reached its apogee and is on the way back down.

Considering the iron grip that the authorities have on all forms of information transmission, the country will appear to be going along quite nicely right up to the day when they put a rod through the block just like the old Empire of Evil.


post turtle saver's picture

bingo... I crack up watching people post numbers about China like they're absolute fact and treating US numbers like "impossible! all lies!"... these idiots actually trust Chinese accounting, two words that when put together define comedy...

you see who is truly strong by inspection... King Dollar bitchez... flight to quality... flight _out_ of China...

Max Steel's picture

theft of ipr ? common idiots 

International patent filings: Chinese company Huawei leads the pack

. Brush up .

JoWazzoo's picture

What makes you think they will sell?  Why should they? With poerhaps the exception of Canada a few years ago (though they of course reversed course) has any sovereign eliminated its debt?  No.  US 18 T and climbing 1/2 T a year.

QE can be thought of as a leveraged buy out.  The difference is that there are no market forces to reduce or eliminate the CB leverage.  Is there? Congress gonna force the Fed to sell?  The Dictator?

Yen Cross's picture

 Chinese charts are my specialty.

  The CNY fix just before Tokyo every day sets the carry$ trade in Asia.

 Don't believe me? Wait for the cny fix and short $usd risk.emand

  I'm already parking liquidity in the new system.

  Liquidity+ Demand=arbitration.

Crawdaddy's picture

If you were pontificating on this topic, holding a beer and a braut, around a campfire, where would you tell the fellow amigos to park their 401ks/roths?

Crawdaddy's picture

No biggie and I love it that nobody here would feel obligated to give a rats ass. I lost my internet bet that someone would reply before the amigos here around the campfire lost focus. Not at all unusual. Now ESPN is once again the place where life is determined. Thanks ZH!

new game's picture

i'll answer, dollar. at least for now. post every which way but inevitable war, well that is hard to predict. there will be a time to trade dolla for gold, and that is coming. china is great popcorn watcking event. eat slowly though, only in the 3rd inning...

reader2010's picture

There is nowhere to hide. Participation is mandatory. 

davidalan1's picture

China is FUCKED, rhey were idiots to buy are debt and serve our pathetic need for all things electronics. They have no transparency in banking, NONE...did i say they are fucked? wath and learn...

Yen Cross's picture

 You're correct... China is FUBAR!  It's going to take a couple of years.

Brazen Heist's picture

From 13% GDP growth in 2007, to 7% in 2015...

Yen Cross's picture

More like 3.5-4%?

 China tried over the last 3-4 years to let the yuan "power up" for internal consumption, to offset their external deficite.

 The euro @ 1.08 vs usd? lmfao. China exports lots of trinkets priced in $usd to europe. Commodities are priced in $usd.

 Raw materials> $usd

sun tzu's picture

Why is euro 1.08 vs USD LMFAO? The euro is toast. I just made a pretty penny with put options on FXE from 1.12 to 1.08. Closed my position right before expirations today for 150% + gain. The USD is a piece of turd, but the rest of the world is even worse. 

post turtle saver's picture

... and those numbers are inflated, not to mention completely unsustainable...

downwiththebanks's picture

Nonsense.  China is going to do the smart thing and get those dollars as expensive as they can go.  DUring this time, they're cashing out of treasuries for gold, for the BRICS bank, etc.

Once they milk it for long enough, China/Russia/Iran/India... jointly pull the trigger on the Petrodollar.  See what happens to all those expensive dollars once that goes down.

lazysunday's picture

What evidence do you have of that? all the evidence points towards that China is a house of cards and the banking cartel of the west has China in a box.... But because all you do is hate the west, you fail to see that there are no unicorns to supplant these overlords....

cigarEngineer's picture

There is a reason why they park their money in London/NY and not Beijing/Shanghai. USA is for sale and it's the cleanest dirty shirt. As bad and totalitarian as the US is, the BRICs are even worse. They just don't have 80K SWAT raids on their citizens every year.

napper's picture

would you care you list your evidence in support of your claims?

Unknown Poster's picture

What are the Chinese banks doing with their new stash of fiat bucks?  It is outside of the fed's control. 

Yen Cross's picture

 They'll use them to finance there new global trading conglomerate.  UST

 I'm teasing you. China is liquidating it's UST holdings. The PBoC is capping borrowing costs with RRR deductions.

Brazen Heist's picture

China's holdings of UST have been approximately flatlining in the past year to around $1260b. Russia on the other hand has dumped $50b in UST in the past year, - a small amount and a drop in the ocean compared to what China could do if it decided to dump hard. But China wouldn't want to dump all of a sudden since it will devalue their remaining holdings. A smart approach would be to dump slowly over time, but I haven't seen it yet from the numbers.

cigarEngineer's picture

I don't think we can trust the numbers. Why would they telegraph a move? They certainly have less in treasuries than they're reporting.

new game's picture

you don't believe the feds reports? ha,...

MollyHacker's picture

Most Likely the fed will QE4 to cover a more rapid sell~off of treasuries from China if necessary. China will most likely take interest rates to nirp as slowly as possible to soften instability in its own market behaviors buying time against outright depressionary forces. Printing outright has severe consequences at the bullion banks.

HenryHall's picture

Yep. China needs to sell a bunch of US Treasuries for greenbacks and use the greenbacks to buy Yuan and gold in the international exchanges.

Problem solved.

Unknown Poster's picture

The chinese banks must want a return on their US$ assets. Funnel them to NY real estate?

Brazen Heist's picture

My guess its got to do with their semi-fixed exchange rate regime, where they still must keep USD reserves to maintain the peg. Once they decide to unpeg from the USD, then they can start kissing the UTS goodbye.

Unknown Poster's picture

I thought they used fixed bayonets to maintain their semi-fixed exchange rate regime. ;]