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The Numbers Are In: China Dumps A Record $94 Billion In US Treasurys In One Month
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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Bomb New Zealand and the Cook Islands.
Nuke Antarctica too.
*Occupy New Zealand, rape Cook Islands. - Joint Chiefs' Directorate 2015
bingo
"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."
I thought China's UST holdings were 1.3T. This 3.6T figure looks more like total UST held by all Foreign countries. Do they have 2.3T USD other than UST?
Yes. Remember all those pallets of freshly printed Benjamins we shipped to Iraq? They ended up in China. IMHO.
HUNDREDS OF BILLION OF DOLLARS SOLD
And the USD didn't even twitch...
Ah, Grasshopper. That's because Belgium is buying all of them. Simple.
They see the same graphs I see.
Self-destruct in play.
You all assume there will be a place to hide.
All purchased using a USD / EURO swap line.
Swaps are the new gold for use in "balancing" internation trade imbalances.
Of course you know, this means war.
It has already started on many fronts. The Chinese and Americans/NATO are already engaged in real combat for a few years; just never reported.
http://www.blogtalkradio.com/drakebailey/2015/08/29/sat-aug-29th-with-dr... (Go to the 27th minute for more info on the statement above)
Feds dead (cabal dead), just having trouble falling over quickly is all. The system is dead and rotting in front of our very eyes. Debt jubilee coming your way once the deadwood is handled properly and a new system with proper checks and balances will be put into place soon. There will be no war beyond the proxy wars we see now, all this and I can juggle also.
My point, relax and enjoy the show and tell the ass wholes to stick their fear up their collective assets, we dont want anymore.
It's always possible Kolchak - you might get your Jubilee. But between NAFTA, TPP and the open boarder policy it won't make much of a difference. In fact, the "New Deal" will be worse than the current debt. Debts can be cleared. This new arrangement will only be able to be cleared with blood.
"My greatest flaw. I surround myself with idiots."
- Victor von Doom
Blood hasen't worked in the last 13k years give or take and I'm certain it won't now either.
Oh and China bought $1.4 billion of gold in August 2015, or 40 tonnes.
http://katchum.blogspot.hk/2015/09/china-gold-reserves-china-bought.html
this dovetails nicely in the IMF plan, i woudn't be surprised if bejing didnt liquidate stocks in order to buy gold, and know this when the price of gold drops to any degree that is to allow someone to be a buyer in size.
seriously... china has had it with a unilateral imp/exp uno-sided fx/carry-trade arbitrage.
sdr's will be just enough to cover (expenses) trade left on the check-books minimum balance sheets.
surely, china can find better places to park it's trillions, rather than support the ussa hegemony that wants to destroy them...[?] and, get a much better return in all of ASIA!
or, am i missing something
ps. china is telling the ussa that we,(china) don't need your fucking dollar currency, and its your problem now...
A perfect time for the Fed to raise rates by a bold 0.10% and blame China.
Any objective analysis can see currency debasement taking place, so the Chinese will buy hard assets from any fool willing to accept U.S dollars. All nations holding U.S treasuries should liquidate them as conveniently expedient while the U.S is honouring and only hold enough U.S dollars plus 10% in reserves, in order to conduct trade essential in this currency. The dollar is dead and anybody with half a brain should recognise this.
tightening into a tightening is the way the fed is supposed to work, they should follow the markets lead. these people are too accustomed to central bank unicorn policy. china liquidated their bonds in order to support their stock market, only once the process began did the peg begin to falter. china didnt say, oh lets drop the peg and float the currency and see what happens. of course the feds decision to hike rates had something to do with it, your reserves are facing a certain devaluation, use them or lose them. from illiquid treasury bonds to illiquid dollars. curiously the fed is probably okay, china has dumped 1/3 of its holdings over this proposed 1/4 point rate hike, (can you imagine a full half point?) at the end of rainbow the IMF issues its currency, those who sold their dollar reserves will get less of the new stuff. so why is janet yellen smiling?
Based on you analysis; seems like the FED will be "damned if they do & damned if they do not". If the FED sees a massive dumping, then why not raise rates higher for the reasons you gave. The FED balance sheet will explode more and the interest on the US debt will be magnified and quite possibly the entire house build on sand comes crashing down and great will be its fall. As I see it; anything can go wrong at any moment and the world of finance is walking on a tight rope 100 stories high with no safety net.
A rate hike would mean that you'd want to preserve wealth in Treasuries.
In a financial world where nothing makes sense, there is lasting political security in China by supporting the liquidation of UST for physical gold.
No other economic action (inaction) imbues as much national zeal, provides for a sound future, is something not likely to vaporize, and passively attacks US hegemony.
All any junior adviser need say is; 'liquidate until yields increase.'
'Greater debt costs to the US hasten their demise.'
Now if only China didn't have the same Asian political culture to save face and kick the can down the road like Japan with all its bad corporate debt.
That is the foot race. Can China passively send UST to 4% before its own debt load spark uncontrollable internal inflation.
china's market in all of asia is populated by ~ four-billion consumers.
china makes stuff.
asian countries save big in their own backyard.
the ussa makes nothing!
yes, they make finance / insurance / and real estate (FIRE) but, have exported the 80% / pop. of consumers into the minimum wage bracket of feudalism with enough left over from part-tyme (two job minimums at minimum wage = 32hr work week/ no benni's) to buy everything the chinese can sell them at the 'dollar tree stores' or on the shelfs of a fast sel-destruct 'wally`mart'!
thank you slick willy`clinton and hello hillary in 2016 to finnish the double-dildo job!
The US makes the most expensive weapons systems in the world. Why do you think the US encourages war so much?
The US government wants to sanction China next after Russia. It's looking for a pretext: a cyber hack or a dispute over an artificial island built by China without asking the World Policeman.
This means that China may have troubles withdrawing their hard-earned dollars stored in US bonds. Dump them as quickly as possible.
As foolish as that sounds (sanctions on China) from a "common sense" viewpoint; seems like a psychopath would sever their entire being if they feel it is in their best interest. The folly of it all.
The hypocrisy is laughable. You can buy UST but never sell them?
In China’s case, selling them is their “flight to safety”.
But seriously, who bought all that debt?
Who bought it? Probably the Fed with help from the US Treasury. The Fed's balance sheet is growing and growing and...
US pension funds, of course.
Meanwhile somewhere in the sea: Russian submarine with 20 ICBMs and 200 nuclear warheads is sailing to Syria
I dump't a record china this morning... sticking right up outta the water it was.
The one who has contempt for instruction will pay the penalty, but the one who respects a command will be rewarded. A wise man's instruction is a fountain of life, turning people away from the snares of death. Good sense wins favor, but the way of the treacherous never changes. Every sensible person acts knowledgeably, but a fool displays his stupidity. -- The foolishness of God's wisdom to the unregenerate.
Exacerbated by the actions of our own Central Bank, it would appear that China is prepared to take this "Currency War" to the Nuclear Level at the time of their own choosing.
Be Prepared! Diversify into Hard Assets, And hold a bit of Cash for a time when ATM's refuse to cough it up, as merchants refuse Credit Cards, Demanding "Cash Only"!
I still don't get it about liquidity. There is only a liquidity problem if third parties buy and sell bonds among themselves. However, if anyone approaches the Fed window to sell US Treasuries, the Fed has to buy them or the US is in immediate default. And as we know, the Fed can print unlimited liquidity to buy any bond presented to them. So why wouldn't every seller of a Treasury bond present it to the Fed instead of bothering to find a third party buyer? Why make the effort? It seems that liquidity is only a problem if third parties chase their tails trying sell to other third parties.
Also, Jim Willie has been talking for ages that the Fed will never raise interest rates because it will implode the CDS derivatives market.
you mean we've got to bail out the 'AIG' again at taxpayers expense...
don't you?
poor em'd`greece monkeys
You can't escape it, that is serious business. America, as we know, lives off of debt, government debt is issued to cover around 1/2 the entire federal budget. China has used it's trade surplus to feed money back to the USA by buying it's debt. If this is now over, you have to replace the China buyers, with other buyers. Someone must soak up the T-Bill flood. Who? Anyone?
Ben & Janet couldn't run an ice cream store.
\
And so? What is so bad about consumers paying less for goods? All of this is nonsence. The real question is who is buying and at what price.
Oh btw, I wish someone would explain what interest rates the fed can raise. After all they don't raise, nor lower the federal funds rate.
Less cost will mean less revenue for smaller companies and they will be forced to shut down unless they are a large monopoly which can make up for costs at another store in another city. Supply goes down, price goes up with demand. Though I do believe this is by design and the dog and pony show the politicians are performing on stage is just to make us believe they did not expect this.
Cash. Cash.
Booze, gold, weed, currency, cash is king.
Great strategy, dump US paper and buy physical metal, rare earth while London and NY manipulate the metal prices down to protect their own over exposed ass. Secondly, invest in Africa, build roads and infrastructure, buy mines and take advantage of US paper while they can. Mean while the American empire is distracted with IS 5th century knuckle daggers in the mid East and at the same time it's playing checkers with the Russians who are playing chess. Good for China.
If we don’t understand both sides of China’s balance sheet, we understand neither
By Michael Pettis · September 1, 2015
Glad you posted this article. Although it is said that you can lead a ZHer to water but you can't make them drink.
You're welcome.
Pettis presented therein a beautifully stated and long overdue recognition of the demonstrable down side of debt growth, years before it even becomes an overt 'crisis'.
It's one that anyone with a credit card and a brain knows, as credit/debt increasingly limits their economic activity and disposable incomes after the initial splurge and misallocated spending and status displays, long before a personal financial crisis is encountered.
Yes indeed. But getting hoi polloi here to just click on this link is a herculean task. Many do not want to understand. They want scatological, knee-jerk reactions for their favourite bete noires.
Is it me or could they really try harder. It's like hey america you shoot me in the foot, I will scratch your shoes.
Seriously, dump $100 bil a day. Grow some and actually change this paradigm. That would still take you a month to dump it all.
At this rate, my grand kids will be commentating here for me.
Everyone says the Chinese are liquidating treasuries to defend the yuan. Is it possible that this argument needs to be reversed?
What if the original intent was to liquidate US treasuries, and the devaluation announcement was made so they would fetch a better price?
Interested to hear everyone's thoughts on this.
IMHO this shitslide into fiscal oblivion has been kicked off by the US. We've seen the dynamic now - there is no end until the global round robin of fiscal devaluation results in the fiat exploding into nothingness. So China has all these US treasuries that are valued in US dollars...dollars that are headed towards zero, like all fiat currencies. Timing aside (which is political), I think China is just divesting itself of what it sees as an investment that is turning into crap. I wouldn't like to be left holding 3.5 trillion dollars worth of nothing. You?
Not when they could be in hard assets. Russia is pulling the plug on the US. I just think China is moving towards the same.
Currency wars end up being trade wars. Trade wars eventually go hot.
Interesting times.
"My greatest flaw. I surround myself with idiots."
- Victor von Doom
quite
(although imo the reason is less to get a good price as to avoid accusations of financial warfare)
both, devaluing and selling USTs, gives political cover for the other:
We are not devaluing for a currency war, we are actually trying to prop it up by selling USTs, see?
We are not dumping USTs, we are being forced to intervene to prevent the RMB from devaluing further, see?
And... another 'chemical explosion' - O(20t of TNT).
Three times is enemy action.
You would actually think by reading the ZH material that comment section would have to be a little elevated. As a registered user for 5yrs (& 21wks) I must say that the quality of comments I read here would make the bathroom wall solicitations in the bathrooms of all that respond to this comment read like Tolstoy.
I hadn't read the comments here for years and figured I'd take a look to see if they improved. The funny thing is it's actually gotten worse. It's a bunch of tea-bagging sycophants who think a martingale is some horse term they've heard at the stable they clean.
Most of the commenters on ZH should read Le Bon's 1895 classic The Crowd: A Study of the Popular Mind because he's writing about you.
the market needs negative sentiments. this is essentially a 'hedge'
putting it on my reading list
STFU,.... doosh.
Moar Smirnoff. This is getting Nasty--
Frankfut am main
$94 billion is less than a month and a half of QE.
Garbage article. What is sold, if any, is all t-bills and shortest maturity paper.
Looks like zerohedge is on Rubin"s payroll.
Guess who will buy these Treasuries? Underfunded pension funds. Yes, the government will say they should hold more "safe" assets. That's how government moved the losses to the savers (among many other options).
Banks will also be called upon to own more liquid cash assets (ie Treasuries). China selling = more financial repression.
In the last 26 days, four Chinese "chemical plants" have blown up (bombed?).
Perhaps the U.S. wants China to strike back and start a war. The U.S. then can blame China for the financial collapse that is at the door.
Just saying.
I have no proof but think it's self done for insurance $. Heard a great story on NPR for a change. A reporter in the field went to a coal district. Instead of 20 plus percent growth, they were having 2 percent. A concerte factory went from employing 1,000 to less then 100. Problem inventory for the city's = liquidate for top dollar while you can.
China needed a way of dumping US bonds before doing x. The currency wars started by the Fed gives them a great excuse to dump the bonds.
It's a moderate sized deal in itself but it's the x - if it happens - that will be the big deal.
blame it on China https://research.stlouisfed.org/datatrends/usfd/page7.php The only question is are the shorts stopped by decree (2008 China) or does the Sunguard switch just get pulled? Blame it on Sony/KGB/N Korea/Iran Hey property tax usury criminals how you like those MBS's and Short term lending..
Whoever is careless with the truth in small matters cannot be trusted with important matters. Albert EinsteinSo, all this selling is within the uptrend and not through its support?
These are enough treasurys to put some containers in low earth orbit!
The big question is what China is spending these dollars on. For instance are they buying stock in the US corporations who built lots of factories in China but have been gradually moving them out in recent years to cheaper countries.
Nope. Probably boils down to what is the nature of the absorption.
that new silk road initiative requires a lot of investments in other nations outside of China, those still require USDs.
Fair enough.
If they were buying stock in those kind of US corporations that would be a clue to what they were planning.
https://www.youtube.com/watch?v=K6JTjhWUUyI
suck it or not, pick your poison organisms, enjoy the half day
And the Federal Reserve is buying every one them up.
no, they're really not. It would be nice if someone on this site actually fact-checked anything they thought before they just vomitted it out of their head into the comment section at ZH.
https://research.stlouisfed.org/fred2/series/TREAST
And what makes one trust the one to be trusted as the truster of the trust? After all, given the nature of the Fed, are they to be trusted?
This is precisely where the ignorance of ZH commenters shines brightly. You see conspiracy everywhere but have no concept of how data within a system (any system) gets produced. I think you imagine the data released by the Fed is produced by the 12 FOMC members not the 100s of economists and social scientists the Fed employs. Fabricating numbers out of wholecloth, as you seem to imagine, would be quite difficult when the data is produced by others. A conspiracy of the magnitude you imagine would require complicity among hoards of Fed employees with insufficient skin in the game to participate
You buid in your mind this fantasy that they make up numbers, instead of merely finding a positive narrative to spin the disappointing data.
Oh like you mean the Unemployment data..? Or perhaps you would be referring to the FX swaps to ECB or BOJ ?
Just the facts 'mam.
No conspiracy accusations and especially no theories shall i expound.
http://ocsure.blogspot.com/
And how much is in their off-balance sheet?
Only a fool and believe the Fed. Used only to trade on.
How many times did they say they would raise rates?
A moving target.
Just like their member banks, Mark to Fantasy accounting.
Recall Benenake saying subprime was contained. Was it?
Also recall in front of congress Bernanke saying he would not monetize debt. How many QEs? Three so far...
QE4 is assured.
If you start picking and choosing the Fed data you choose to believe and the Fed data you choose to think is bull shit, you may as well stop reading ZH. He cites more data produced by the Fed than nearly any other source.
Bernanke's comments on subprime and in front of congress were comments, not data. I'm providing you data from the Fed and you're choosing to ignore it. That's fine, but then don't turn around when negative data emerages from the same source (i.e, the Fed) and use it to prove things are unraveling. It makes you sound like an idiot.
China still have way too much $US.
Wake me when they get bellow $US1trillion.
Every time the Chinese sell Treasuries, an angel gets its wings.......ahhhhhhhh.....errrrm.....ahhhhh.......I mean a chemical plant explodes.
Every time Chinese sell Treasuries, an angel gets its wings........I......ahhhhhhhh.....errrrm.....I mean a chemical plant explodes.
So, how does the U.S. dollar keep strengthening?
Lots of reasons but one is we're in a depression and everyone in the world is trying to devalue their currency to boost their trade - except the US who need the dollar to be over valued to pay the bills.