China's Record Dumping Of US Treasuries Leaves Goldman Speechless

Tyler Durden's picture

On Friday, alongside China's announcement that it had bought over 600 tons of gold in "one month", the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.

 

We then put China's change in FX reserves alongside the total Treasury holdings of China and its "anonymous" offshore Treasury dealer Euroclear (aka "Belgium") as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted - namely virtually the entire delta in Chinese FX reserves come via China's US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.

 

We explained all of his on Friday in "China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium", and frankly we have been surprised that this extremely important topic has not gotten broader attention.

Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China's dramatic reserve liquidation

Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.

JPM conclusion is actually quite stunning:

This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).

Incidentally, $520 billion is roughly triple what implied Treasury sales would suggest as China's capital outflow, meaning that China is also liquidating some other USD-denominated asset(s) at a feverish pace. So far we do not know which, but the chart above and the magnitude of the Chinese capital outflow is certainly the biggest story surrounding the world's most populous nation: what is happening in its stock market is just a diversion.

At this point JPM goes into a tangent explaining what the practical implications of a massive capital outflow from China are for the global economy. Regular readers, especially those who have read our previous piece on the collapse in the Petrodollar, the plunge in EM capital inflows, and their impact on capital markets and global economies can skip this part. Those for whom the interplay of capital flows and the global economy are new, are urged to read the following:

One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. Reuters data on trade finance only aggregates loan syndication deals, which have mandated lead arrangers and thus capture the trends in the large-scale trade lending business, rather than providing an all-inclusive loans database. Perhaps the largest source of regularly collected and methodologically consistent data on trade finance is credit insurers (see “Testing the Trade Credit and Trade Link: Evidence from Data on Export Credit Insurance”, Auboin and Engemann, 2013). The Berne Union, the international trade association for credit and investment insurers with 79 members, includes the world’s largest private credit insurers and public export credit agencies. The volume of trade credit insured by members of the Berne Union covered more than 10% of international trade in 2012. The Berne Union provides data on insured trade credit, for both short-term (ST) and medium- and long-term transactions (MLT). Short-term trade credit insurance accounts for the vast majority at around 90% of new business in line with IMF estimates that the vast majority 80%-90% of trade credit is short term.

 

 

Figure 4 shows both the Reuters (quarterly) and the Berne Union (annual) data on trade finance loan syndication and trade credit insurance volumes, respectively. The quarterly Reuters data showed a clear deceleration this year from the very high levels seen at the end of last year. Looking at the first two quarters of the year, Reuters volumes were down by 25% vs. the 2014 average (Figure 4). The more comprehensive Berne Union annual volumes are only available annually and the last observation is for 2014. These data showed a very benign trade finance picture up until the end of 2014. Trade finance volumes had been trending up since 2010 at an annual pace of 8.8% per annum (between 2010 and 2014) which is faster than global nominal GDP growth of 6% per annum, i.e. the trend in trade finance had been rather healthy up until 2014, but there are indications of material slowing this year. This is also reflected in world trade volumes which have also decelerated this year vs. strong growth in previous years (Figure 5).

Summarizing the above as simply as possible: for all those confounded by why not only the US, but the global economy, hit another brick wall in Q1 the answer was neither snow, nor the West Coast strike, nor some other, arbitrary, goal-seeked excuse, but China, and specifically over half a trillion in still largely unexplained Chinese capital outflows.

* * *

But wait, because it wasn't just JPM whose attention perked up over the weekend. This morning Goldman Sachs itself had a note titled "the Curious Case of China's Capital Outflows":

China’s balance of payments has been undergoing important changes in recent quarters. The trade surplus has grown far above previous norms, running around $260bn in the first half of this year, compared with about $100bn during the same period last year and roughly $75bn on average during the previous seven years. Ordinarily, these kinds of numbers would see very rapid reserve accumulation, but this is not the case. Partly that is because China’s services balance has swung into meaningful deficit, so that the current account is quite a bit lower than the headline numbers from trade in goods would suggest. But the more important reason is that capital outflows have become very sizeable and now eclipse anything seen in the recent past.

 

Headline FX reserves in the second quarter fell $36bn, from $3,730bn at end-March to $3,694bn at end-June. While we estimate that there was a large negative valuation effect in Q1 (due to the drop in EUR/$ on the ECB’s QE announcement), there was likely a positive valuation effect in Q2, which we put around $48bn. That means that our proxy for reserve accumulation in the second quarter is around -$85bn, i.e. the actual “flow” drop in reserves was bigger than the headline numbers suggest because of a flattering valuation effect. If we put that number together with the trade surplus in Q2 of $140bn, net capital outflows could be around -$224bn in the quarter, meaningfully up from the first quarter. There are caveats to this calculation, of course. There is obviously the services deficit that we mention above, which will tend to make this estimate less dramatic. It is also possible that our estimate for valuation effects is wrong. Indeed, there is some indication that valuation-related losses in Q1 were not nearly as large as implied by our calculations. But even if we adjust for these factors, net capital outflows might conceivably have run around -$200bn, an acceleration from Q1 and beyond anything seen historically.

Granted, this is smaller than JPM's $520 billion number but this also captures a far shorter time period. Annualizing a $224 billion outflow in one quarter would lead to a unprecedented $1 trillion capital outflow out of China for the year. Needless to say, a capital exodus of that pace and magnitude would suggest that something is very, very wrong with not only China's economy, but its capital markets, and last but not least, its capital controls, which prohibit any substantial outbound capital flight (at least for ordinary people, the Politburo is clearly exempt from the regulations for the "common folk").

Back to Goldman:

The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.

In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.

But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China's Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman... and this website of course.

Finally, if China's selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

Or let us paraphrase: how soon until QE 4?

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Super Hans's picture

Lube up bitches, 'cause its going to hurt!

SH

zaphod's picture

Curious?!?!

China has a full fledged debt contraction starting, it needs to raise funds from any source possible to pay for all the measures they are taking to prop up their stock and construction markets. That means selling CB assets to pay for things. 

It's just getting started, China has a long way to unwind.

 

 

Laowei Gweilo's picture

so what's the forecast?

 

if PBOC does this for too long, they're going to further destroy their exports... seems like it's good be a rather careful and short term balance as liquidating to fund stimulus (indirectly through liquidity and rates) but also not strengthening the renminbi too much

 

if they sell too much to support stimulus and liquidity, it won't make cuz crashing exports will undo it. but if they do too little, exports won't matter when the economy and markets are in shambles.

NoDebt's picture

That article was a dense tome to sift through, but well worth it if you can hang with the linkages.  This is like an old school ZH article in a lot of ways (good ways).  I like shit I still can't completely understand, even after several readings.

I believe it can be summarized thusly:

1.  Chinese rats from a sinking ship, desperately clawing over eachother to get above the fray.  "Sell everything and get me the hell outta this mess."  In other words, there are very powerful people in China in some very deep shit.  And the PBOC is selling USTs en masse to back-fill the hole of capital fleeing the country.

2.  Pegging your currency to the dollar in the midst of de-dollarization is dangerous.

Point 1 I think we all understand at a certain level, and is probably the more important point.  I'm not smart enough to weave de-dollarization into this theme, though.

 

Renfield's picture

<<This is like an old school ZH article in a lot of ways>>

Seconded. They changed owners but seem to have kept at least some of the old crack staff. It used to take me a half hour to plow my way thru an article, and when I got thru it my brain was full. He didn't hold your hand, that Tyler of old.

Manthong's picture

crap ...    that's it

I'm buying all of the Vasoline stock I can get my hands on.

I just hope “God’s work” Blank-F has huge positions in Chinatown.

Manthong's picture

"offshore Treasury dealer Euroclear (aka "Belgium").."

...sounds like collusion to me..

but WTF do I know anyway?

f them belchish waffles and sprouts

Manthong's picture

It has to happen sooner or later..

Just wait until they announce 10K tons of AG..

..then the next trillion UST’s goes down the tubes and they won’t care,

 

and actually I am a bit amazed.. I grokked everything of the above.

 

apologies to R.A.H.

 

Manthong's picture

One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. “

Well the good news is that TTIP and TAP will fix all of that     Ha Ha  Ha Ha Ha Ha  Ha Ha Ha Ha

F me with a spoon

 

MisterMousePotato's picture

I remember lurking here a year before I could get a sentence to parse.

MonetaryApostate's picture

Anyone wanna play the shuffle game??? You know the game of follow the ball, where's the ball, go ahead place your bets, and pick a cup... It's a game of fool the guessers...
http://galeinnes.blogspot.com/2015/07/mouse-traps-galore.html

DaveyJones's picture

"...leaves Goldman speechless."

Don't worry,

you can still commit a crime without talking

Temporalist's picture

Wow almost 250,000 reads on this article.  It must be up in the top 10 all time on ZH (just guessing).

 

And this:

BRICS bank opens for operations in Shanghai

https://www.rt.com/business/310321-brics-bank-begins-operations/

Amish FinEng's picture

OH MY GOD ZeroHedgers. OMG!

Here comez the big crash. Hang on to your hats.

OMG!

TheRedScourge's picture

I suspect they are simply raising cash and have been buying stocks directly from their own stock market without telling anyone.

InvalidID's picture

 

 And lets not forget that once the sanctions on Iran are lifted China owes Iran over 100 Billion USD's for oil...  Lot's of reasons for China to be raising USD's right now.

sgorem's picture

"The big question is obviously what is driving these flows and how long they are likely to continue." whats so hard in understanding about 'selling' future worthless paper, usts, and buying gold on the cheap here lately, to back the NEW WORLD RESERVE CURRENCY? is everyone fucking clueless out there?

americhinaman's picture

i am amazed at the very american attitude taken by this article.  "savings are bad" is the mantra of the day.  china has accumulated a staggering war chest of savings (FX reserves and other government assets), and now that they are deploying a small fraction of that war chest people think they are panicking.  if you think critically from the perspective of someone who saves for a rainy day, here are some alternative conclusions one can make:

1) capital outflows are from individuals and businesses, and they occur as capital controls are being lifted.  this has been predicted, and even planned, by the central government because they acknowledged over that their FX reserves had become so large as to be a liability.  if private people and companies are buying FX-denominated assets, that gives the government a coincident opportunity to sell their reserves.

2) china is selling treasuries because they have made enormous gains on them.  having accumulated a huge amount of treasuries over the past decade+, with treasuries yields near all-time lows, and with the dollar at multi-year highs... it is perfectly sensible to liquidate some of the best-performing assets.  or perhaps they think that yields will rise either voluntarily via the fed or involuntarily if the rest of the market decides to sell treasuries.

3) china's FX reserves drawdowns are significant, but a much smaller amount has been actually liquidated to buy RMB than any of the zerohedge or quoted bank analysis suggests.  very simply, the FX reserves are (i guess) roughly half in non-USD assets.  if the USD has gained roughly 10% over the past year, then that would suggest a roughly 5% drawdown (200 billion) is simply revaluation of the non-USD assets.  this is emphasized because the western media always converts china's reserve reports into USD.  if you reported the reserves in EUR, then i am pretty sure they would actually be up on the year.  bottom line is that they have only done minimal RMB purchases to account for treasury/USD sales.  there have certainly been *some* capital outflows which the government has happily traded back into RMB for, but it's been an entirely inconsequential amount.

DeadFred's picture

They aren't panicking, it's an act of war. The target is the Eurodollar which is getting kicked in the teeth because all those trade imbalances won't get covered.

MisterMousePotato's picture

There is another point to be added:

4) China has concluded that their USD assets risk being worth substantially less (in real terms) in the future, which should come as no surprise to those who spend as much time on ZeroHedge as do I. So why wouldn't they try to maximize their return now, when all that does, apparently, is raise a few eyebrows amongst the cognoscenti? At the current rate, it'll be years after China's finished before any in Congress or this administration even notice, much less do anything (assuming there is anything to be done).

fiftybagger's picture

How much silver at current prices does 1 trillion dollars of those reserves buy?  50 years of world mining supply.  China's calling the shots.

Manthong's picture

Obumbler needs to hose Kerry and put me charge of State

I might be a little shorter than Mr Ribbon Man, but I have way bigger pecks,  tricepts, biceps, and toned abs….and maybe I am a better shot and have a slighly better tan than Vtlad. .. even though he is a couple years younger than me.

but I would not prefer to put on the kido and do some judo with him.

I have seen his soul...   not unlike the 43rd pres liar and destroyer of the 4th Amendment....

 

..but I can never be orange enough to beat Boehner.

 

i'm done here


 

LawsofPhysics's picture

^^^THIS!!!!  Very simply put, the exchange of real goods and services is the only thing that matters!!!

All those SNAP babies in the U.S. better start learning some tradable fucking skills!!!!

NoDebt's picture

Now THAT is a worthy counter-point.  Everyone here now understanding why good articles beget good discussion?

Put up an adult article and you get adult replies like this one.  Green arrow.

I don't mind being the back-marker in understanding in threads like this one.  

Spitzer's picture

You cant taper a ponzi scheme.  If you pile up checks and you don't cash them, you don't know how much real purchasing power is there regardless of the size of the pile. They might be half way through the real purchasing power.

You don't know. Nobody does.

Manthong's picture

Geez.. well considered thoughts.

CheapBastard's picture

China seems to be handling their situation and transition well imo. So far, I have not seen the Chinese equivalent of a trembling Hank Paulson scaring and threatening the end of the world. I also have not seen any Chinese versions of IndyMac that screwed its depositors big time..or a WaMu and so on.

 

Seems pretty normal to me.

Row Well Number 41's picture

They skipped Hank and went straight to, we will arrest and possibly shot sellers.

I don't think that is "Handling it" well.

#41

neilhorn's picture

Maybe someone should have given Hank a gun. Hopefully he would think it was a hot dog and eat it.

SimplePrinciple's picture

The points are all good.  One I thought especially needed raising is the last one.  All this talk of a rate hike is probably just cover for the inevitable.  The Fed knows China's selling, but wants to look to be in command.

Handful of Dust's picture

Why not sell treasuries and buy cheap commodities like gold, more iron, coal, oil, etc. After all they're very cheap right now.

mt paul's picture

often wonder if China

beats the paper price down

 

then scoop up the physical..

works for me

Manthong's picture

Patience,   Grasshopper

847328_3527's picture

That's what I think they are doing; selling their paper while it's too high an dbuying gold an doil, copper, etc. Converting paper into hard assets they can actually use for construction, military, etc.

TeethVillage88s's picture

Just read a line or two and it reminded me of a book I read a little of.

USSR owned the DDR(East Germany after WWII) and they wanted control even after Stalin Died. There was a German Communist who fleed to Moscow who was swiftly put in place in East Germany after the victory. They wanted to use the old Communist Germans, but created a fake 2 party system that they then just dominated and even broke laws (Like the USA). Then They had Brain Drain with the open borders the smartest people fled, they couldn't really assemble factories very well in USSR even with plans from what I heard.

But then the communists started taking wealth & property and they disassembled the factories or industrial activities and shipping them to Russia or parts of USSR.

Sounds like Free Trade in the USA. The wealth gone(Capital), Technology gone to China, Skilled People now in China with the R&D, Factories now in China.

Almost like the Communist took over in the West under Bill Clinton or H.W.Bush.

Creepy A. Cracker's picture

Yeah, those frick'n consumers, huh?  Can you beleive that they REFUSE to purchase products at double the price that are made in the USA?

Tip: Markets do what consumers demand.  If consumers demanded that everything that they buy be made in the USA, no matter the price, they would be made in the USA.  At the present time wages in the USA are too high compared to slave labor wages in China.  Also, the extreme government regulation burden in th USA drives prices up and consumers to purchase less expensive made in China products.

Of course there are exceptions to this but in general the global economy will drive US wages down because people/businesses continue to refuse to buy more expensive, made in the USA, products.

SuperVinci's picture

Yes. read Moldbug. America is a communist country.

Totoaly ironic in light of my school days in the 70' and 80's...nuclear drills in the hallway (cover your head with your books, line up against the lockers), commie this commie that, the RED SCARE we learned about....haha...the commie's get the last laugh cuase folks, what america is now, is a commie ideologocal society. These are commie code words: egaltarian, equality, progressive, democrat, political correctness, diversity...so may more. feel free to add on anyone.

Manthong's picture

wow A-Man   a really good read.. thank you

"FX reserves had become so large as to be a liability"

you are a pro

 

but y'know  maybe it will be negative interest time for them... :-D 

Ghordius's picture

+1, excellent counterpoint to an excellent comment to an excellent article

+1 for "...attitude taken by this article.  "savings are bad" is the mantra of the day"

+1 for"this is emphasized because the western media always converts china's reserve reports into USD.  if you reported the reserves in EUR, then i am pretty sure they would actually be up on the year"

though... "but it's been an entirely inconsequential amount"

it does have consequences if it's enough to reverse the course of the FED and unleash QE4. the usual search or worry about the one straw that is too much for the camel's back

as I am fond of writing here since years, the monetary game becomes hotter only when the the talk is about FX Reserves

MachoMan's picture

it does have consequences if it's enough to reverse the course of the FED and unleash QE4.

I'm not convinced that the Chinese haven't already obtained permission by the FED for these actions, and more...  There is this consensus dominant view that the U.S. and China are diametrically opposed, but most of the conflict I see is little more than bickering between professional wrestlers.   

Ghordius's picture

+1 MachoMan. well, professional wrestler aren't that different from nuclear-armed superpowers: in both cases, smashing the face of the opponent too hard is a lose-lose scenario

yes, I know, professional wrestler decide beforehand who is going to win, and what, and how, and that is where this simile ends

(nevertheless, the Soviet Union lost, remember? ergo long live the Russian Federation)

opponent and competitor are not the same as enemy-to-the-death

LawsofPhysics's picture

LOL!!!  What exactly did the Soviets lose again?  I see a great number of real assets in Russia today.

Looks like the yanks will get to choose between another Bush/Clinton, but then again that's freedom not an oligarchy right?

The exchange of real goods and services is the only thing that matters so all those SNAP babies in the U.S. had better learn some tradable skills in a fucking hurry.

 

Ghordius's picture

and are those assets at the disposal of the ruling Communist Party? no. so the One Party lost, and so the SU ceased to exist

methinks that many on this blog make too little difference between a State and the People

LawsofPhysics's picture

Again, LOL!!! "At this point, what difference does it really make?"

 

americhinaman's picture

yes, there are certainly global consequences to China's trade/current account surplus and FX transactions; i didn't mean to imply otherwise.

all i meant is that the amount of USD/RMB traded was inconsequential from China's perspective; i.e. they aren't panicking about selling a couple hundred billion USD.  if anything they are happy to do it at a measured but significant pace.

The Ingenious Gentleman's picture

In response to americhinaman:

Para 1: FX reserves are not savings. They are borrowings. The PBOC has to borrow yuan to purchase FX.

1. Capital outflows may have been predicted, but they are certainly not welcomed.

2. China bought most of the treasuries as the yuan was appreciating against the US$, so the treasuries have mostly declined in value against the yuan that was borrowed to purchase them.

3. (a) It is almost certain that over two thirds of China's FX are in USD assets, not 50%.

(b) a year ago the RMB-USD exchange rate was 6.2:1, exactly the same as today, so the USD has not gaines a penny against the yuan, let alone 10%.

 

 

FreeMoney's picture

Not all fx reserves are borrowings.  You will also accumulate fx reserves from a positive trade imbalance.  That a small part of that trade imbalance is leaving china or more specifically leaving paper asset and moving to physical asset ( in real estate and gold ) is no great surprise.  I thought I was an article on ZH that said china was also wanting to transition from a producer/exporter economy to a domestic consumer economy.  

americhinaman's picture

Freemoney addresses a couple of these, but i would like to clarify INLINE for anyone who is confused by these comments.

 

In response to americhinaman:

Para 1: FX reserves are not savings. They are borrowings. The PBOC has to borrow yuan to purchase FX.

FX RESERVES ARE SAVINGS.  YOU CAN ARGUE WHETHER THEY ARE THE GOVERNMENT'S OR THE CITIZENS/COMPANIES', BUT NOT WHETHER THEY ARE SAVINGS.  TECHNICALLY, THE PBOC HAS PRINTED RMB TO BUY USD AND EUR FROM INDIVIDUALS AND COMPANIES WHO HAVE PROFITED FROM DOING BUSINESS ABROAD AND HAVE... FOREX SAVINGS!  INDIVIDUALS AND COMPANIES ARE INCENTIVIZED/REQUIRED TO CONVERT THEIR FOREX SAVINGS INTO RMB.  YOU CAN ARGUE THAT THESE SAVINGS REALLY BELONG TO THE PEOPLE/COMPANIES OF CHINA, SINCE THE ACT OF BUYING FX LOWERS THE VALUE OF THE RMB AND TAKES AWAY PURCHASING POWER, AND THAT SOME THEORETICAL DAY IN THE FUTURE THEY SHOULD SELL THE FX AND BUY BACK THE PRINTED RMB, BUT WHO KNOWS WHETHER THEY WILL.  

ANOTHER WAY TO RECOGNIZE THAT FX RESERVES ARE SAVINGS IS THE FOLLOWING THOUGHT EXERCISE.  IF THEY ARE SIMPLY PRINTED DEBT WITHOUT THE BACKING OF SAVINGS, THEN WHY DON'T ARGENTINA, ZIMBABWE, PIIGS, ETC. ALL PRINT LOTS OF CURRENCY TO BUILD UP ENORMOUS FX RESERVES?  THE REASON IS THAT THEIR COUNTRIES DO NOT HAVE THE PRODUCTIVE/PROFIT CAPACITY TO SUPPORT DOMESTIC CURRENCY PRINTING TO BUY FOREX.  THEIR DOMESTIC CURRENCY WOULD DROP IN VALUE FASTER THAN THEY COULD ACCUMULATE FX RESERVES... THINK ZIMBABWE.

1. Capital outflows may have been predicted, but they are certainly not welcomed.

THEY ARE WELCOMED AT THE PACE THAT THEY HAVE BEEN HAPPENING.  IF THEY WERE FORCED TO SAY SELL 1 TRILLION USD IN A YEAR TO SUPPORT THE RMB, THAT WOULD BE A PROBLEM.  A COUPLE HUNDRED BILLION IS FANTASTIC... A PACE OF 20 YEARS TO COMPLETELY CONVERT BACK TO RMB (IF THEY SO CHOSE TO DO SO) OR PERHAPS A PACE OF 10 YEARS TO GET DOWN TO A MORE "MANAGEABLE" 2 TRILLION USD WORTH.

2. China bought most of the treasuries as the yuan was appreciating against the US$, so the treasuries have mostly declined in value against the yuan that was borrowed to purchase them.

CHINA NET PURCHASED BOUGHT TREASURIES AT YIELDS FROM 20% DOWN TO ABOUT 2%.  THE INTEREST HAS BEEN COMPOUNDING FOR ABOUT A DECADE OR SO.  LET'S SAY THAT THEY AVERAGED 5% YIELD ON THEIR TREASURIES (THIS IS SUPER-CONSERVATIVE... MORE LIKELY THEY NETTED 7-8% ON AVERAGE), OVER AN AVERAGE LIFE OF 10 YEARS.  AFTER COMPOUNDING AND REINVESTMENT THAT'S A 63% GAIN I.E. 1.05^10 - 1.  USDRMB HAS DROPPED ABOUT 25% IN THE LAST 10 YEARS.  LEAVES A GAIN OF 38%.  ALSO YOU HAVE TO NOTE THAT SINCE THESE ARE ACTUALLY DEDICATED FX RESERVES, THE ALTERNATIVE WOULD HAVE BEEN TO BUY EUR OR JPY SOVEREIGN DEBT (NOT MANY OTHER COUNTRIES WITH MARKETS DEEP ENOUGH TO SUPPORT THE LEVEL OF PURCHASES).  I'M PRETTY SURE THOSE HAVEN'T DONE AS WELL.

3. (a) It is almost certain that over two thirds of China's FX are in USD assets, not 50%.

IF SO EVEN BETTER FOR THEM FROM THE PERSPECTIVE OF HOW MUCH THEY HAVE GAINED.  I DON'T KNOW FOR SURE, AND I DOUBT ANYONE OUTSIDE OF A HANDFUL OF CHINESE LEADERS KNOW FOR SURE.

 

(b) a year ago the RMB-USD exchange rate was 6.2:1, exactly the same as today, so the USD has not gaines a penny against the yuan, let alone 10%.

FROM THE CONTEXT I THOUGHT IT WAS CLEAR THE USD'S GAIN WAS RELATIVE TO A BASKET OF NON-USD CURRENCIES.  FOR EXAMPLE, THE DXY HAS GAINED ABOUT 20% IN THE PAST YEAR (ROUGHLY THE SAME AS WHAT THE USDEUR HAS GAINED).  SO IF THEY HAD 4 TRILLION USD OF CASH UNDER THE MATTRESS SPLIT 50/50 IN USD AND EUR (OR DXY BASKET), THEN THIS YEAR THERE IS A 10% LOSS IN USD (400 BILLION) OR 10% GAIN IN EUR.  BUT IN THIS ILLUSTRATIVE EXAMPLE, THE LOSS OF 400 BILLION USD VALUE IMPLIES A PURCHASE OF.... 0 RMB.