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China Outflows Said To Surpass A Staggering $300 Billion In Under Three Months
Whether Janet Yellen admits it or not, you can bet that going into today’s most important Fed meeting ever (until the next one) the supposedly “data dependent” FOMC has taken a good hard look at what’s happening in China in the wake of Beijing’s not-so-smooth transition to a new currency regime.
We’ve detailed the story exhaustively, so we won’t endeavor to recap it all here, but the short version is that what was billed as a move to give the market a greater role in setting the yuan’s exchange rate actually had the opposite effect - at least in the short run. That is, the PBoC used to manipulate the fix to control the spot and now they simply manipulate the spot to control the fix, but unabated devaluation pressure has forced China to intervene on a massive scale and that intervention recently moved into the offshore market as well, as Beijing scrambled to close the onshore/offshore spread. This is costing China dearly in terms of FX reserves, the liquidation of which was so massive in August as to prompt Deutsche Bank to brand it “Quantitative Tightening”, as the reserve drawdowns are effectively QE in reverse. This is of course the same dynamic that’s been taking place in Saudi Arabia in the wake of the petrodollar’s demise and mirrors the response across EMs which are struggling to support commodity currencies as prices collapse.
Attempts to quantify the scope of China’s reserve burn have become ubiquitous, as the cost of offsetting the outflows from China effectively serves as a proxy for the extent to which the Fed would, were they to hike, be “tightening into a tightening”, as we’ve put it.
On Wednesday we showed that Beijing liquidated $83 billion in Treasurys in July. That, as we also noted, “is before China announced its devaluation on August 11 and before, as we also first reported, it sold another $100 billion in Treasurys in August.”
Today, we get a fresh look at the numbers courtesy of SAFE which shows that on net, banks sold $128 billion in FX to Chinese non-banks in August. Nothing too surprising there, given that we already knew positioning for FX purchases for the banking sector as a whole dropped by $115 billion for the month.
As Goldman notes however, when you include banks’ forward books the picture worsens materially:
An alternative gauge that we believe is a closer reflection of the underlying trend of currency demand shows a significantly larger outflow of $178bn.
Today's data at US$178bn on our preferred gauge of underlying currency demand (i.e., outright spot plus freshly-entered forward contracts) is significantly higher than any of [the previous] releases.
This means, as Goldman goes on to point out, that outflows are actually far worse than what’s indicated by simply looking at China’s reserve drawdown, as banks look to be shouldering some of the burden themselves:
We think this suggests that banks used their own FX position (i.e., without resorting to PBOC's FX reserves) to absorb part of the outflow pressure.
So between July and August (inclusive of freshly entered forwards), outflows total around $261 billion.
But that’s not all.
Nomura is out with an estimate of what’s taken place since the start of September.
Between onshore spot intervention and offshore spot and forward intervention, the bank estimates China has spent some $47 billion month-to-date stabilizing the yuan, $25 billion of which in the offshore market, reinforcing what we said a week ago after CNH soared the most on record:
Note the rationale here: this is China intervening in the hopes that said intervention will make further intervention unnecessary. That is, rampant speculation that the yuan will continue to depreciate is forcing the PBoC to intervene in the onshore market and at an extremely high cost both in terms of the country's FX reserves and in terms of the deleterious effect the reserve liquidation has on liquidity. Devaluation expectations are at least partly manifesting themselves in the offshore spot market so ultimately, the PBoC figures it will try intervening there in the hopes that narrowing the spread will mean it has to intervene less in the onshore market. Summarizing the above in four words: one more spinning plate.
Here's what $25 billion in CNH intervention buys you:
What all of the above means is that all in, outflows totaled some $308 billion in the space of two and a half months.
Some speculate that between stepped up capital controls and a Fed hike, the situation may stabilize (there are those who think FOMC liftoff will serve to calm the market by removing uncertainty), but consider the following from Commerzbank's Zhou Hao:
Increasing FX intervention could be one of few options left. Some companies and real-money funds could look to purchase dollars by selling offshore yuan, so China may extend defense offshore. Frequent intervention burns foreign reserves and squeezes onshore market liquidity, so further tightening of regulations likely if CNY still under pressure.
Along with this from Maybank's Fiona Lim:
PBOC may intend to narrow CNY-CNH gap to ease depreciation pressure; it’s likely to buy offshore yuan and allowing onshore to move lower via daily fixing.
In other words, even if you're optimistic that the pressure to intervene is abating (as Lim actually seems to be), the above underscores the extent to which this is a ver, very delicate balancing act, or, as we've characterized it over and over, an attempt to manage a collection of spinning plates.
And then there are those who take the straightforward view (i.e. the view that doesn't include the assumption that a Fed hike would somehow stabilize things be decreasing uncertainty), like Citic Bank chief economist Liao Qun who said the following on Thursday (via Bloomberg):
U.S. rate hike should have negative effects on both the Hong Kong property and stock markets and intensify pressure on the yuan and increase the likelihood of further depreciation.
There you have it. In the end, the takeaway is the number shown above: $308 billion in FX outflows in two and a half months.
Your move Janet.
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ancient dutch proverb: "kids putting finger in dyke to stem 400,000 foot tsumani wave are mightily screwed."
:3
There is a lot more where that came from.
I think Krakatoa is more analogeous to this story than a spinning plate.
I'm thinking more Olympus Mons... a nice, long, large eruption and then a dead planet.
Kids shouldnt be putting fingers into dykes anyway. Leave that to other dykes.
Sorry. I wasn't paying attention. What's that about Hillary?
Wrong headline, should read:
CHINA DUMPS $300 BILLION IN US TREASURIES IN LESS THAN 3 MONTHS
so the real question is:
How can the Fed hide $300 Billion in Treasury purchases with unsterilized (printed/electronic) funds while claiming they are not engaging in QE?
Easy, just like the US debt they freeze their balance sheet.
The perfect storm coming. China outflows, Japanese downgrade outflows, Middle east oil price outflows.
Blocking 70% of the internet is sure to cause a massive Brain Drain. We benefit as China loses their brightest and talented people. What's not to like?
So, buy the dip?
/s
They will need to blow all their foreign reserves and then some to stop this dam from breaking.
That's a lot of blood, sweat and factory slave labor tears up in smoke. Mao's great leap foward will seem like a warm up session.
That buys a lot of homes in the west.....
Dock that chink a day's pay for napping on the job!
-- Blazing Saddles (for all you youngsters)
They could never get away with a movie like that in today's world.
Unfortunately, you are correct. PC, legalism, feminism, etc. have taken our ability to joke or even speak our minds without fear of social, economic, or even criminal consequences. :-(
Now that's a fact.
South Park is the only bastion where PC is actively pissed on almost every week. The show may not be everyone's cup of tea, but it certainly hasn't knealt at the alter of PC. They would show images of Mohammed if the producers would let them.. but they won't. Everything else is fair game though.
Of course they would. You teutonic twat...
I liked the blazing saddles scene with the black cowboy and sausages.
Classic!
That's a lot of fiat that needs to find a new home.
Commodities anyone?
DaddyO
I'm trying to decide if China "running out of reserves" is going to be one of those stories like how COMEX is about to run out of gold any day now (but never does).
This phenomenon is called "The Surprising Durability of Paper Promises".
Jim Chanos says that the reserves aren't "What they seem to be" in China, and that the outflow has been running $10B a day lately. And he says many other interesting things...
https://soundcloud.com/robenfarzad/chanos-on-china
Nah ya ditent No Debt!
Maybe the Chinese see several interest increases coming and want to get rid of some bonds before they start losing their value...
Come to Gold ........
More like gold will come to you, in the form of tick tock.........................
Funny because I was just thinking that soon gold will trade down $50 in 1 minute on the morning (any morning) open as Bloomberg reports, "Experts see China selling gold to prop up failing markets".
Then three weeks later Koos will show that they were actually importing more gold than ever, but this won't be printed by Bloomberg.
Same thing happened during the Ruble collapse
China banks' first-quarter capital outflow $109 billion, may persist: BIS http://www.reuters.com/article/2015/09/13/us-china-bis-idUSKCN0RD0B220150913
Word to the wise: don't hang around Chinese ports at night ;-)
"going into today’s most important Fed meeting ever (until the next one)"
Hahaha "until the next one"...love it!
china could sell ust for at least another 7 years at current selling rate.
Not all of their holdings are in such instruments.
And I suspect that the pace will only accelerate.
The central banks plate spinning
https://www.youtube.com/watch?v=Zhoos1oY404
the chinese forex reserve really doesn't belong to them. that's the thing. when USD and other forex comes into the country, the only legal buyer is the government.
back in the day, China had FEC. Foreign Exchange Certificates. The notion was that a dollar comes in. there is a set exchange rate and an FEC note is issued. FEC can be used for imported goods and other official stuff. Foreigners were banned from using the RMB, but used it anyways and there was a blackmarket for the FEC/RMB pair, as it was the ONLY way chinese had to buy imported goods. Once the government had gotten back the FEC note, it was destroyed. Leftover was exchanged for USD and the notes were destroyed. Thus it was all accounted for and RMB was not allowed to exchange for forex. Having exchange rights was actually a BIG deal for companies.
Anyways, same kinda thing here. USD comes in as investment or payment or whatever, and the government snaps it up and issues RMB. But that RMB stays in circulation even when spent or exchanged again for forex. There are no real outside economies with a strong demnd for RMB either, so the chinese regime is the only buyer. exchange rates outside of china for cash are HORRID, no one wants it. So when there are outflows for whatever reason, this reserve dips. A MASSIVE chunk of it is also based on the fact that factories and others have taken out loans in USD (well over $1t at this point). That massive forex reserve can vanish VERY quickly and there's not really much they can do to prevent it. There's about 300m "middle class" now. If say, 70m of them decided to max out their annual forex cap ($50k), keeping in mind that they could very well be using family members and friends to help, it's all gone. 70m is a lot of people though, so, what if, say, some people decided to sell their properties and get out? Using any loophole they could find to transfer the cash. A VERY average apartment in beijing/shanghai can easily fetch $800k right now. 4 million people leave and it's all gone. And Chinese are busy buying homes overseas for more than that as of late.
China exports are dropping, that trade surplus is falling, the high growth is over and people are getting out.
Interesting comment. Surprised to hear such an assessment, however, since you have previously taken a more noncommital view of the situation.
It took China 30 years to build up its fx stash. Might be gone in 3.
Unlike the usual central bank check kiting, this is injecting large sums of actual cash into the designated target markets, which should prove highly inflationary even as the transfusion of cash out of the Chinese domestic economy introduces hard deflationary pressures. Major whipsaws in an already turbulent world economy. Not good for anyone, ultimately.
it'll be gone in much sooner than 3. china is a country of fads. once one thing becomes "hot" everyone does it, regardless of the reason. wait and see what happens when this becomes the new popular trend. it'll get ugly very fast. chinese get rather violent when it comes to perceived loss of money.
China needs to work on strengthening the RMB or it will keep falling and moar money will flow out. Strengthening their Middle Class, control massive corruption and eliminate pollution would help them alot and help curb the serious outflow of money and people. Even Blankfein said similat last month.
China's pretty much fucked itself in that regard.
If the RMB gets stronger, they kill their export. If the RMB gets weaker, they kill off their service sector which has taken on MASSIVE forex loans. There is no real domestic demand, anyone with money wants imports, not domestic. And the service sector that they are trying to push is very immature and not ready for primetime yet. They are being hit at a critical time and they tried to centrally plan a long bull market. That failed and it's now a blackhole of a money pit. The stock market was once meaningless here, now it is strongly linked to some core things.
China has not had a recession in over 30 years. Chinese do not know how to handle one and the government has no clue either, as most of them are fucking morons. Business is unprepared as well, as government has been shielding them the entire time.
My advice: devest from china and get assets out of the country. The smart money has already left, and once the dumb money starts the rush, you will be locked out.
I have read gold demand there is very high now for that very reason; long term value of a hard asset to protect against their currency depreciating which seems inevitable. With tighter cap controls those who are staying with their wealth do not want to hodl cash and do not trust their stawk market. RE is too overvalued while gold is undervlaued.
Seems reasonable.
Holding some of their wealth in gold has paid off for my friends in Canada and Australia where currencies have taking a drubbing to the tune of about 30%, or more.
Informative link you posted. I thought about that also; as the West slows down due to its own depression/recession, demand drops and will affect EMs such as China. Also your article:
The main problem is that asset prices in developed economies have rallied so far on the back of quantitative easing (QE) money, while fundamentals have been neglected. This has left the market very stretched in terms of valuations, with little or no obvious direction from here. Moreover, if the developed economies actually slow down then they have no means of stimulating the economy.
A slowdown is inevitable, though the timing is unclear. This knowledge has rendered the market rightly feeling nervous. And, EMs take the brunt of this nervousness, as always. Seen in this light, EM events are the canary in the coalmine, early indicators of bigger problems elsewhere.