The Numbers Are In: China Dumps A Record $94 Billion In US Treasurys In One Month

Tyler Durden's picture

Shortly after the PBoC’s move to devalue the yuan, we noted with some alarm that it looked as though China may have drawn down its reserves by more than $100 billion in the space of just two weeks. That, we went on the point out, would represent a stunning increase over the previous pace of the country’s reserve draw down, which we began documenting months ahead of the devaluation (see here, for instance). We went on to estimate, based on the projected size of the RMB carry trade unwind, how large the FX reserve liquidation might need to be to offset capital outflows and finally, late last week, we suggested that China’s official FX reserve data was set to become the new risk-on/off trigger for nervous, erratic markets. In short, the pace at which Beijing is burning through its USD assets in defense of the yuan has serious implications not only for investors’ collective perception of market stability, but for yields on core paper, for global liquidity, and for US monetary policy. 

On Monday we got the official data from China and sure enough, we find out that the PBoC liquidated around $94 billion in reserves during the month of August to $3.557 trillion (the lowest since September 2013)...

... and as Goldman argues (see below), the "real" figure might have been closer to $115 billion. Whatever the case, it’s a staggering burn rate and needless to say, were the PBoC to continue to liquidate its assets at this pace, it would necessitate a raft of RRR cuts and hundreds of billions in short-term liquidity ops to ensure that money markets don’t seize up in the face of the liquidity drain.

Here’s some commentary from across sellside desks on the official numbers:

  • From RBC’s Sue Trinh: 
    • China FX reserves suggest about $140b used to defend yuan in April once valuation is accounted for
    • Believes PBOC has been intervening to maintain the yuan’s stability since the devaluation, but this kind of intervention can’t continue indefinitely
    • It’s unsustainable in the long run; yuan is overvalued by around 15% by RBC’s latest estimate; still targeting USD/CNY at 6.56 by year-end and 6.95 by the end of 2016
  • From Commerzbank’s Zhou Hao:
    • Decline in foreign reserves clearly suggests China’s central bank intervened intensively in the FX market to stabilize CNY exchange rate
    • “One-off devaluation” in mid-Aug. triggered market expectations of further CNY deprecation, which has not only endangered the financial stability, but also posts a downside risk to the economy due to capital outflows
    • It’s costly because frequent intervention will burn foreign reserves rapidly and tighten the onshore market liquidity; that said, further tightening of regulations is expected near term
    • Expects spread between CNY and CNH is likely to persist as PBOC has become an active player in onshore market
  • From Goldman:
    • The People’s Bank of China (PBOC) reported that its foreign exchange reserves dropped by US$94bn in August, to US$3.557tn at the end of the month. However, it is not straightforward to derive the actual scale of FX reserves sales from the headline FX reserves data, given uncertain valuation effects and possible balance sheet management by the PBOC.
    • It is possible to get an approximate sense about valuation effects stemming from currency movement: e.g., assuming the currency composition of the PBOC’s FX reserves broadly follows that of the average country’s (using the IMF COFER weights, which suggest roughly 70% in USD for EM countries), the currency valuation effect would probably be positive to the tune of roughly US$20bn (i.e., if we only look at the change in headline FX reserves as a gauge of sales of FX reserves, sales of FX reserves might have been underestimated by around US$20bn, given the currency valuation effect). However, besides currency movements, there could also be significant valuation effects from changes to the market prices of the PBOC’s investment portfolios, and the direction and size of those effects is hard to measure given the uncertainty of the asset composition. Moreover, there could also be possible short-term transactions and agreements between the PBOC and banks that may complicate the interpretation of the change in FX reserves as an underlying measure of RMB demand.

Of course the huge draw down was widely anticipated and indeed, we've explored and detailed virtually every angle of this story in the lead up to the data. The key takeaway here is that we now have official confirmation that August saw $94 billion in reverse QE (and more likely $115 billion) or, quantitative tightening as Deutsche Bank puts it. 

We can, as we explained on Saturday, argue about what the ultimate effect on safe haven assets will be, but what's not up for debate is that conceptually speaking, China's massive UST dumping is the opposite of Western central bank QE and as such should be expected to pressure yields. More specifically, Citi has suggested that for every $500 billion in EM FX reserve liquidation, there's an attendant 108 bps or so of upward pressure on 10Y yields. Similarly, Deutsche Bank, citing the extant literature, flags 50-60bps of upward pressure on 5Y yields for every $100 billion in monthly EM FX reserve liquidations. 

The takeaway, as we put it last week, is that if the Fed hikes this month, it will be tightening into a tightening.

But it's not that simple. It's also possible that, if China's FX reserve draw downs do indeed end up serving as a trigger for risk-off behavior (i.e. a selloff in risk assets), the subsequent flight to safety could end up driving yields on long bonds lower, not higher. We discussed this in detail over the weekend. 

Still, China isn't the only country liquidating its USD assets. When you consider that global EM FX reserves amount to more than $7 trillion, it seems reasonable to ask whether the flight to safety that would invariably accompany a worldwide selloff in risk assets would be sufficient to replace the lost bid from massive reserve draw downs. Or, as we put it on Saturday, "the real question is what would everyone else do. If the other EMs join China in liquidating the combined $7.5 trillion in FX reserves (i.e., mostly US Trasurys but also those of Europe and Japan) shown below into an illiquid Treasury bond market where central banks already hold 30% or more of all 10 Year equivalents (the BOJ will own 60% by 2018), then it is debatable whether the mere outflow from stocks into bonds will offset the rate carnage."

And that consideration, in turn, puts the Fed in a very, very difficult spot. A rate hike cycle will put further pressure on already beleaguered EM currencies which raises the possibility that the FX reserve liquidation will be larger than the eventual safe haven flows and besides, there's bound to be a lag between the liquidation of USD assets and the flight to safety and given the potential for extraordinary bouts of volatility in UST, JGB, and German Bund markets, it's anyone's guess what happens in between. 

Whatever the case, something will have to give here. That is, all of these dynamics (i.e. a Fed hike, China's massive UST dumping, an EM meltdown precipitating FX reserve drawdowns, illiquid markets for the same assets everyone is dumping, hemorrhaging petrostate budgets, etc.) simply cannot coexist for long without something snapping because, as we put it last week, in this very unstable arrangement, the smallest policy error will reverberate exponentially, and those reverberations can lead to only one thing: the Fed's admission of policy failure by adopting a tightening bias, and ultimately launching another phase of monetary easing, be it QE4 or perhaps even the long-overdue and much anticipated Friedmanesque "helicopter money" episode.

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Bernoulli's picture

So is this a big deal? Or not?'s picture

Well helicopter money will be a big deal if you live in US. Imagine free $20000 USD. Spend as fast as you can.

Stainless Steel Rat's picture
Stainless Steel Rat (not verified) Sep 7, 2015 7:36 AM

It would be a whole lot better if they started dumping treasury secretaries... you know helicopter style.  Right, Lacob?

Headbanger's picture

Just give me the fucking helicopter!

JRobby's picture

It is slow until it is fast

Zwelgje's picture

Belgium will buy it.

J S Bach's picture

The tidal wave of Federal Reserve notes will be coming to an American shore near you shortly.

MillionDollarBonus_'s picture

This may have been an issue 50 or 100 years ago, but today we are able to buy our own debt, so China can sell our treasuries all day and it won't have any significant impact on our economy. In fact, I'd rather our Federal Reserve owned our debt than a foreign power who's interests may not be aligned with ours. 

JungleCat's picture

Yeah, and porn actor Ron Jeremy used to be able to suck his own dick. Until he couldn't do it anymore.

I see four possibilities here:

1/ You are new here on ZH
2/ Your humor just isn't funny
3/ You drank WAY too much Kool-Aid.
4/ You are a troll.

Which of the four is it?

Miles Ahead's picture

Try... #5.  It's YOU who are new here and just got Ron's wad in your face.

MDB is the oldest (still standing) ZH celebrity here.  And for the record, his humor is priceless.  But again, since #5... it obviously just went "whooshhh"...

Theosebes Goodfellow's picture

See, MDB? You haven't lost your touch. You can get a crowd riled up with the best of them.

Question: When is an economic war not an economic war?

Answer: When China does it.

So who races to the bottom now, mutha'truckas'?

All your base are belong to us.

BringOnTheAsteroid's picture

What does 100 billion dollars in US treasuries equate to in Chinese terms?

One chemcial explosion.

Crash N. Burn's picture

"There is a 1,450 tonne gap between total gold refinery activity reported by WGC in 2013 and their global gold demand (supply) for 2013:"


This dumping of paper debt while its still worth something only really becomes the final move if the Chinese use the proceeds to cash out of the ponzi, otherwise...

"Dumping U.S. Treasuries is an economic pain, and economic threat – to both the U.S.’s puppet government, and the One Bank itself. However, if China decides to dump Treasuries and use the proceeds to buy gold, that would be the proverbial “double-barreled shotgun”. It would represent (by far) the most direct/overt action initiated by the New World Power against the Old World Power, at least in the economic theater.."


Gold War III: What’s Next?


TruthHammer's picture

"Try... #5.  It's YOU who are new here and just got Ron's wad in your face.

MDB is the oldest (still standing) ZH celebrity here.  And for the record, his humor is priceless.  But again, since #5... it obviously just went "whooshhh"..."


you are the n00b. MDB_ is a fake rip-off loser trying to imitate MDB's humor and routinely failing.  It's only the 1 or 2 that bite on the trolling.  Or the guys that try to claim he's the real MDB that keep his boring pathetic copy trolling going...

Richard Chesler's picture

Chinese are like jews. They'll steal anything that's not bolted down.



Bunghole's picture

Not even close.

Saw Marla post the other day.

6 years plus.

Biff Malibu's picture

Sorry brah, I'm one of the Real muthaphukkin' G's around here, I was on ZH when it was on blogspot.  Would love to hear from Marla and Sacrilege and Cheeky Bastard and Andy Dufresne again.

RockyRacoon's picture

Seen a few come and go myself.  Interesting place indeed!

Exile on Mainstreet's picture

Uh, maybe you're the newbie?
I don't remember the original MDB having an underscore after his name.
Nor was a low pixel picture of the dollar sign and flag.

lunaticfringe's picture

Wait a minute. There are a few of us who have a year or two on MDB. I've been reading his schtick for four years and as sad as it seems, he's been right. That's the really fucked up part.

Dick Buttkiss's picture

MDB is an old hand here, and his sarc routine is appreciated by those of us who understand it for what it is.

Miles Ahead's picture

 that's hilarious... we were miliseconds apart.  Nice to see there's another genius like me in the world!

OK.... /sarc.   Don't want to be hammered.

Winston Churchill's picture

He is also a big stacker on the quiet as well.

He admitted as much after drinking a little too much when posting

one night.

Perhaps his humor is a little dry for you.

clade7's picture

Yeah! Its his come across like a booger eating booboo to foster some excitement and outrage...We all love MDB's satire...unlike fonestar who actually is a booger eating takes a while to get the hang of it around here...good hip shot there though..

Dick Buttkiss's picture

Right about MBD, wrong about fonestar, as cryptocurrencies are the future of money and a whole lot more, including and especially privacy and freedom.

BC6's picture

Dick, you were without a doubt one of the all-time best linebackers, but cryptocurrencies are simply digits wrapped in an enigma of "so-called" security, which no one really understands. It should be the 0 and 1 of it that scares everyone the most. In truth and reality, there is no such thing as a "secure" anything. 

The Blank Stare's picture

It wasn't that funny nor was it that sarcastic

Dick Buttkiss's picture

BC, perhaps you understand how this form of communication works; I don't, any more than I understand how my computer works or most of the things that make up my world.  That doesn't stop me from using them, however, as long as I know how and why.  I understand enough about cryptocurrencies (having been dismissive early on) to believe that they are the future, and even if the grid goes down, my cryptocurrencies will be there when it comes back up.  If it doesn't, then we will have obviously headed down The Road, not just "digits" but the electricity that propels them being the way the modern world works.  

Which is to say, life is no more secure than it is fair, and only a fool believes otherwise.  So one does what one can to increase the odds in one's favor or suffer the consequences.

Me, I and mine live on a sparsely populated mountain in the country, close enough to a mid-size city to work there but far enough away, and sufficiently prepared, to be out of harm's way for an extended period of time.

orez65's picture

"Which of the four is it?"

MDB is a regular aggravation at Zero Hedge.

He/she will not post for a while and then he/she comes back with a hyper-aggravating post, like the one just posted.

MDB is doing this purposely to aggravate or he/she is a total and absolute moron.

Incidentally, MDB, "buying" with counterfeited US dollars by the Federal Reserve is FRAUD.

It leaves the door open for a hyperinflationary event.

If the Federal Reserve buys all comers on a rising interests environment then trillions of US Treasuries will be sold and likely result in hyperinflation.

Miles Ahead's picture

(knock knock....) helloooo?  Anyone home???

clade7's picture

"Its the Plumber!"...

the parrot replied, as the punchline to an old joke!

Theosebes Goodfellow's picture

~"MDB is doing this purposely to aggravate or he/she is a total and absolute moron."~

Au contraire, mon ami! MDB's views, contrarian to most of Zhers, is held in high regard for its eternal optimism, robust exhuberance and Pollyannish perspective. The man blows more sunshine bubbles up the arses of pessimists than a fart unicorn. That they, sheltering from the rain of their gloomy personal clouds, quite understandably take umbrage at MDB, but it isn't his fault the rain faills where it may.

Okay, that enough sticking up for him. I need a drink.

piliage's picture



MDB lures another unsuspecting earnest blogger into his web of troll-dom.



cornflakesdisease's picture

#5.  He is right.  You collapse-a-tarians are a hoot.

China IS part of the federal reserve system and bought and paid for.


One happy family.

windywoo's picture

"Our" fed is owned by a bunch of mostly foreign El-ites.

LibertarianMenace's picture

I love the sight of reductio ad absurdum in the morning...looks like...sense!'s picture

If there is even a hint of FED buying back the treasuries quietly (waiting on Tylers to figure it out how who bought 115b of treasuries from China) there will be an effect. This means QE4 is ON, it means USD is going weaker. The number gimickry is possible, but the effects will be very real.

Payne's picture

Of course the Fed is buying back,  China wants to keep it a secret but gives hints, crazy.  

The Fed will raise the rates and yes QE4 right after that.

The FEDs actions will force countries around the world to drop the dollar as a peg as they cheapen currencies.  They will sell treasuries to assist in devaluing their own currency.

Race to the bottom but unfortunately FED cannot play the same game, not even in the race.

Bill of Rights's picture

Who is this " ours " you speak of comrade ?

q99x2's picture

Reply to Million Dollar Bonus. Ours? Nothing is yours. Not the Bill of Rights or the Constitution of the US. Its over Rover. The global regime of economic interlinking corporations and organizations run your government. By de facto you have no government or military to protect you. You live in an occupied nation controlled by financial perverts. You get Trump and Bruce Jenner and the propaganda of two women passing the Ranger tests of carrying 200 pounds on their back for 27 miles, a black computer math wiz in every TV show or as the heads of special CIA and FBI organizations. If not black then you'll get to watch a woman play those same roles. You'll get a Muslim president and pay taxes to fund operations to take down the World Trade Centers. You are fucked. Face up to it and do something you schmuck.

Just kidding. We don't have nations on Q99x2.

Johnny Fiat and The Contangos's picture

You are just beautiful.  Really.  

You are a cherished toy that should be played with everyday..

Hankster's picture

and then we all suffer whiplash

KnuckleDragger-X's picture

The liquidity problem is out there waiting. I think they are going to run out of people with cash before they run out of Treasuries. This will have an effect on the FED since they are also trying to get rid of theirs and the bond market which is already becoming unstable is likely to barf its guts with nothing left to hold it up.......

JRobby's picture

They will fill the camps before they give you $20k

max2205's picture

China dumps and the Fed prints to buy them

How else are the 30 yr stable 

BruntFCA's picture

 Exactly, all this "financial analysis" is just hyperbole at this point!

So China sell 100b USD, and this is supposed to reduce liquidity by sucking in dollars from the so called "market"? As the poster above said, the Fed could just as well be buying these up via the famous"Belgium" proxies; actually printing *more* dollars.