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China's FX Reserves Fall By Third Most On Record As Outflows Persist
When the PBoC reported the change in Chinese FX reserves for October, some were surprised to learn that apparently, Beijing’s warchest actually grew by $11 billion.
Why was that surprising? Because over the preceding three months, China had liquidated some $300 billion in USTs as Beijing struggled to contain the fallout from the “surprise” August 11 deval.
As it turns out, manipulating the spot to control the fix (versus manipulating the fix to effectively reset the spot) entails quite a bit of intervention when everyone is banking on continued depreciation. So, in order to contain the devaluation and close the onshore/offshore spread, China tapped its FX reserves to ensure that yuan weakness would be “managed” and would unfold on Beijing’s terms, not the market’s.
But October’s reserve data seemed to indicate that suddenly, the pressure on the yuan had dissipated and the outflows had ceased. We would later discover that when you look at the bigger picture which includes bank settlements and forward transactions, the outflows continued unabated during October.
On Monday, we got the latest data from the PBoC which shows that during November, China’s reserves fell by around $87 billion. Stripping out valuation effects, the figure is probably closer to $40 billion (in other words, China probably sold some $40 billion in US paper during the month).
“The figure may not capture all the PBOC’s intervention efforts as the central bank also transacts in the forwards market to support the currency,” Bloomberg notes. And here’s the customary warning from Goldman: “...headline FX reserve data may not necessarily give a comprehensive picture on the underlying trend of FX-RMB conversion by corporates and households.”
In other words, the headline figure likely underestimates the pressure on the yuan and as usual, we won’t get a clear picture for at least another week. Here’s Goldman:
In our view, a preferred gauge of the FX-RMB conversion trend amongst onshore non-banks would be SAFE data on banks’ FX settlements on behalf of their onshore clients (to be out on December 17th). That report captures banks' FX transactions vis-à-vis non-banks through both spot and forward transactions. Data on the positions of FX purchases will likely be out around mid-December.
The headline figure represents the third-largest decline on record and as FT reminds us, China's official reserves have fallen in nine of the last eleven months. "The unprecedented declines have raised worries that the reserves could quickly evaporate if capital outflows continue and the central bank continues to defend the exchange rate," FT adds.
Of course capital outlfows most certainly will continue. Indeed, the fear is that Beijing is in fact targeting a deval on the order of some 20% in order to resuscitate the country's flagging economy and it's not clear that the expected inflows from SDR inclusion will be sufficient to offset the inexorable capital flight facilitated by end-arounds like the UnionPay ruse and the country's network of "Mr. Chens." "China in recent months has tightened its already stringent capital controls to keep needed funds within the country," WSJ notes (see our full account here).
“Since October many countries around China have experienced some capital outflow, and China has had its share. The strengthening dollar is bound to cause some repositioning into dollar assets," Xie Yaxuan, economist at China Merchants Securities in Shenzhen said on Monday, reinforcing the notion that a Fed hike may well exacerbate the pressure on China and other EMs.
“Although a weaker renminbi could give a mild boost to export competitiveness, the PBOC appears concerned that a depreciation would set back their efforts to encourage increased international use of the currency and could slow the process of economic rebalancing toward consumption,” Capital Economics says, suggesting that Beijing isn't likely to simply let the yuan go now that SDR inclusion is secured. Further, if the headline figure net of valuation effects suggests a $40 billion drawdown, the figure inclusive of unsettled forwards will likely be far larger.
In any event, you can expect the outflows to continue unabated if for no other reason than the fact that while no one is quite sure where the yuan goes from here, the general consensus is that over the long haul, the trend will be towards a weaker exchange rate in the absence of an abrupt economic turnaround. That means that up to and until Beijing finally moves to an honest float, FX reserves will continue to fall, "Mr. Chen" will contine to run a lucrative business, and bitcoin may well find favor among Chinese looking to move money out of the country without buying grossly overpriced real estate in Manhattan or London.
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Dang! Gotta tell y'all, all the hews sure looks good today, don't it?
Why I can't even remember what the predident said last night .... Wasn't it something like a John Wayne interlude about the "Only good Muslim is a dead Muslim"?
I forget
China were told by the IMF not to let the spread between onshore/offshore yuan get too wide otherwise it could affect SDR inclusion/weighting.
We saw this a couple of weeks ago, massive intervention in the offshore market by Chinese banks.
This will go on all year until the Chinese massively devalue the yuan when people are not expecting it.
The central bank of China is among the worst in the world.
All cenrtal banks are evil.
If they are hanging out with the US central bank, hou'd be correct-they are among the worst....
Selling shitty paper to support shitty paper.
All in a ponzi!
i know if i had a lot of money and i was in china i would be trying like hell to get me and my money the hell out of dodge asap.
Where exactly would you go? Pretty much every currency is screwed.
Hell, I'm in Europe and I'm doing the same thing!
I never keep more then 20K in my account.
selling things of worth to prop up what's become worthless... the Chinese aren't the only ones guilty of this...
They are doing the opposite, getting rid of USD and replacing it with gold and real world assets. Those bunk treasuries that you love so much are coming home to haunt us. You can buy them at their ridiculous face value, and be a true patriot (and a moron...;)
That's why America will need to increase it's rates way faster and even higher then 0,25%
To cover all the excess dollars, they'll need to soak up almost 2 trillion pretty soon and if loans to the private sector and small businesses don't start to rise pretty fast or if they decrease, they'll need to soak up even more or the dollar will crash and America will finally start to import all the inflation it exported over the last 2 decades.
And that... will be a killer for every American because we'll be talking 200 to 260% of inflation when that happens.
And that's where lies the creepy stuff because we're entering a new recession.
So now we'll get a recession where the FED will need to tighten...
THAT'S THE GREEK SCENARIO!!!!!!
5 dollar hookers? If you can afford them!
You still don't get do you? China is DUMPING all its foreign treasury to replace it with its own yuan's. Why china wanta to holds other country currencies when your own currency have been acknowledge as an SDR basket?
US don't holds much external FX, caused it is the world prefered FX basket now. Not for long.
However? If you telling the world, you're dumping foreign FX, and replacing it with yuan's? 2 things would happens:
1. The foreign FX you dumps will FALL IN VALUE. Not good exchange value for you.
2. Your Yuan's will revalue UP too high, and you'll killings your own export. Not good when you're still trying to revive it.
Not next year (perhaps 2017) you'll hear report china fx basket? Will mostly consists of yuan's. And i think china wouild have a hell of time trying to devalue it again (just look swiss/japan futile efforts to devalued their currencies).
reply to you 2de point:
They are massively expanding in Africa for the last 5 years. They're creating their own cheap manufacturing continent en will try to export their inflation that way by creating a market over there. Also, to lower commodity prices, they're having their own mines now in Africa which is still a pretty much untapped continent. Europe and America forgot this after they lost their colonies but Europe was build with the revenuestream from those mines.
And what are we going to do? I really don't know any factories that actually make consumer goods anymore over here. Sure, some assembling companies that assemble parts imported from china to avoid import taxes but that's it. All others are box movers and brand companies.
And then there's the gold buying spree in China.
And buying gold is a perfect way to tighten while still holding something of value. It's not really mention in speeches by Peter Shiff or others but gold is a inflation killer. The money that goes in gold is gone. So, you either raise rates or you either buy gold.
That's why banks really hate gold because they cause deflation if a country buys to much gold.