Gold, Bitcoin Soar After China Liquidates Most Reserves On Record To Defend Currency
A little over two months ago, when official PBOC data revealed that not only had Chinese reserve outflow slowed down, but actually posted an uptick in October, we warned that "Capital Is Still Flowing Out Of China, Here's How Beijing Is Hiding It", in which we explained that in taking a page from the western bankers' playbook, the Chinese central bank had shifted to less "traceable" forms of currency manipulation, namely via "forwards". To wit:
Standard central-bank intervention to support a currency generally involves selling dollars and buying the home tender. In this case, China’s large state banks borrowed dollars in the swap market, sold the U.S. currency in the cash spot market and used forward contracts with the central bank to hedge those positions.
"If you can intervene without actually diminishing your reserves, it’s somehow viewed as better," said Steven Englander, global head of Group-of-10 foreign exchange-strategy in New York at Citigroup Inc. Such central-bank activity "may not look quite as dramatic as the sale of reserves, and they may prefer that optically," he said.
Since this form of FX intervention does not impact cash reserves and is not reflected in a change of underlying spot securities, China could intervene for an extended period and not show it, which is precisely what happened in October and November.
The problem is that this only works for a limited period of time, and only if the manipulation with synthetic instruments works. In this case it failed miserably as the latest collapse in the Chinese currency has demonstrated. It also means that sooner rather than later, the PBOC would be forced to revert to traditional, cash-based intervention.
And then came December.
As the PBOC revealed overnight, China’s foreign-exchange reserves plunged much more than forecast in December, capping the first-ever annual decline (of $513 billion) as authorities sought to prop up a weakening yuan. More importantly, the $108 billion decline from $3.438 trillion to $3.330 trillion - far greater than the $20 billion estimated - was the largest on record, and shows that while on the surface the Yuan was stable, behind the scenes the PBOC was furiously dumping securities to prevent an all out currency rout as outflows hit a record.
As a reminder, "liquidating reserves" is a financial euphemism for selling government bonds, mostly US Treasurys.
To be sure, the massive intervention explains the relative stability of the Yuan in November and December. However, it appears that the Chinese central banks has decided to stop intervening aggressively, if at all, in 2016. By now, everyone has seen the result: "the weakening of the fixing contributed to a selloff in stocks that led exchanges to close early on Monday and Thursday after the retreat triggered new circuit-breaker mechanisms. China’s CSI 300 Index plunged 7.2 percent Thursday."
More from Bloomberg:
"It’s inevitable: The PBOC is intervening, there are a lot of capital outflows, and the yuan is facing larger depreciation pressure," said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. "The PBOC now wants to maintain stability in the yuan index and not versus the U.S. dollar.”
The government will "allow for more depreciation, use reserves and tighter controls on cross-border capital flows," said Wang Tao, chief China economist at UBS Group AG in Hong Kong. The yuan will continue to decline against the dollar this year and foreign reserves will drop to $3 trillion, she said.
The paradox that China finds itself in is that as it devalues the currency in what it hopes is a controlled fashion, the FX outflows soar, forcing the PBOC to intervene and slow down the devaluation, leading to a self-defeating process in which China not only devalues far slower than it hopes, but results in an accelerated depletion of reserves. And once China's reserves decline by a few hundred more billion, that will be the time to panic.
Which brings us to this week: as Bloomberg adds, "the fact that the central bank cut the fixing so much this week signaled that the authorities are worried that the economy is challenged by increasing downward pressures," said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. "Considering the weak fundamentals, the long-term trend for the yuan to weaken and for the capital to leave the nation hasn’t changed."
Which means even more devaluation is in stock for China, which means even more reserve liquidation, which means even less dry powder to contain future outflows and out of control devaluation, all of which culminates into a great unknown, one which however does not have a happy ending.
So how are traders reacting?
Moments ago gold finally broke out above the $1,100 resistance level which so many sellside experts warned it would never be able to cross again...
... while that "other" currency, bitcoin, has soared by 5% overnight, not on some idiotic narrative about a Russian pyramid schemer's website, but because of what we first warned in September (when bitcoin was at $225): the more the Yuan devalues, the faster Chinese depositors will seek to circumvent China's capital controls and convert their increasingly less valuable money into either other currencies (via bitcoin), or into gold.
(16 votes)
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I guess you are right. The yen's rise against the dollar over the past few days has been quite dramatic.
Fortune cookies are not a traditional Chinese custom. They were invented in 1920 by a worker in the Key Heong Noodle Factory in San Francisco.
your name not withstanding; i found your 'fact' useful
@useless_fact I see what you did there
My physical Kangaroos are looking more beautiful every minute. I still think I'll buy more though. The top is miles away yet. I told my work colleagues to buy 1 oz coins when the AUD was 1.07 USD and they ignored and ridiculed me. Now AUD is 0.704 USD. Who is the conspiracy nut now? Sorry? Couldn't hear you over your sobbing. How much for your children? I wish to buy them from you.
How much for the little girl? Classic Blues Brothers...
I'm looking forward to a lot more cheap chinese garbage to flood Amazon the year!
Also, any Chinese person who got out and bought US Real Estate looks like a genius right now. A LOT more to go for the US housing bubble.
LOL, from currency wars to currency fails.
Who would think China was the first to bust.
Many more currencies can fail.
Expect riots in China as people get desperate.
I dont buy this (humor not intended)--How could such a liquidation occur with the dollar reaching multi year highs against many currencies (ie Aussie .698 USD and USD 1.41 CND)--maybe they are reducing FX but I bet it is buyingstuff-- Gold, Oil, and maybe a few tankers to store the stuff and resell in the new reserve currency YUAN or keep considering the powderkeg called the middleast.
Does appear to be a contradiction. Plus, I think we've learned to be skeptical of any numbers that China releases. Why should we have faith in this one?
"Soar" hmm. What percent change constitutes a "soar"?
if gold or silver go up more than a 1/4 of 1%, to ZH, that is soaring.
That's because even Zero Hedgers are beginning to understand gold and silver are useless bits of metal.
Because you can't eat them, right?
Well, Wall Street wanted higher yields on US theft bonds. Should have been more careful what they wished for. China's clearly about done importing the US inflation kept under control for 30 years by offshoring.
Never fear, though. Riyadh will keep oil under USD40 a bit longer. The lid will be taken off inflation after Hillary is crowned queen and gun confiscation begins in earnest. Everything is awesome.
LOL, Chinese market flatlined. Patient dead.
Party leaders, get out the paddles, set it for 1,000 volts.
Ag action last 72 hours just too weird. Someone is trying hard to supress. Something's gotta give.
between the time you wrote this and the time I'm writing this
large MILLIONS of ouces o silver have been mined,
how much cheap Ag do you want ?
nebbish...
All of it?
"
between the time you wrote this and the time I'm writing this
large MILLIONS of dollars of fiat have been printed" fixed it for ya
According to Macquarie Research:
https://app.box.com/s/5a4c8phvhb3p8cfp7x2zv01u1mqx0sao
China choices – narrowing
Between a rock and a hard place
Policy decisions are being made on the run...
- China seems to be increasingly making decisions on the run. As discussed in our prior reviews (here and here), China is between a rock and a hard place. It is facing an irreconcilable set of choices, with structural reforms and desire to place the country on a sound long-term footing clashing violently with short-term objectives of stability and reduction in excessive levels of volatility.
- Opening capital account and liberalization are in conflict with the country’s persistent objective of controlling both quantity and prices (an impossible feat but China is constantly attempting to do both). Liberalization and de-regulation (including SOE and public sector reforms) threaten to undermine hoarding of labour force and place greater pressures on wages, but hold out a long-term promise of significant competitive and structural benefits. Capital market reforms, whilst improving long-term capital allocation and supporting consumer re-balancing, expose large parts of the economy to disruptive changes. It is truly a dilemma from hell without any obvious exits.
...due to failure to re-balance & challenging global outlook
- Most of these challenges stem from China’s persistently high saving rates (~48% of GDP) which forces the country to continue investing (~45% of GDP) whilst exporting the balance to other countries. As discussed here, we believe China is starting to run into a number of natural constraints (such as declining ROE/ROIC; rapidly rising debts; diminishing capacity of other countries to absorb China’s surpluses). The easiest and the least painful solutions are not available (i.e. spontaneous rise in consumption at a higher rate than increase in investment and robust recovery in global economy and trade). Hence, China is facing a multitude of sub-optimal decisions and choices, such as significant rise in public sector spending; transferring value from corporates to households; devaluing Rmb; and/or blunt administrative directives.
- The problem with each of these choices is that addressing one area causes significant disruption in another. Lowering Rmb helps with competitiveness and releases some of the pressure, but at the cost of lower domestic liquidity and potential for significant capital flight. Given that China can no longer deleverage, it must ensure that liquidity constantly rises and that there are always ‘bubbles’ to support further leveraging. Unlike the Fed, China seems to be uncomfortable with the idea of perpetual leveraging, even though it does not have an alternative. Hence, confusing signals between reforms and administrative actions. Whilst in the last eight years most governments have been using direct intervention, administrative measures work best when they are relatively consistent rather than rapidly changing in the mid-stream.
Lowering China weighting; adding to India, Phil and Mal
- Although we maintain that China has a broad range of instruments and low degree of external vulnerability, we believe the current confusion is inviting much larger capital outflows whilst unnecessarily prolonging the agony of high volatilities. Unless China abandons reforms (such as introduction of capital control), it has no choice but to further lower currency; embark on fully-fledged QE and embrace non-capital market reforms. It is decision time and risks are rising. We are lowering our position in China, adding to our existing overweight in India and the Phil whilst also raising Mal to neutral weight.
Bitcoin is not a "currency" it is a medium of exchange. A "currency" is a note that is "due and current". Therefore any unbacked paper script is not "currency" dither.
Markets to be saved by Gartman this morning.
Gartman has gone full on bearish on the collapse in China last night.
This places the odds of a market bounce from the open at 99.9999999%
Monero would be a better way to move money out of China than Bitcoin, since Monero is anonymous.
Who is China selling all these Treasuries to?
USA
but they are not printing anymore, where do they get the money ?
There was a story in the last couple of days about how the US is selling a lot of gold to China. So, there you have it.
Jim Willie predicts the bottom will come when China can't get its gold anymore.
If China is going from over $300 trillion to $3 trillion in reserves this year (did I read that right?)...well, you know...
You remember that cheap smart phone?
The one that contains difficult to recover silver?
(yeah)
(the next one will be 3 times as much)
Silver is EASY to extract. Melt the entire thing down and the silver and other PMs simply float away.
Thats all there is to it? Idiot...
How exactly do you just melt a phone? How do you collect all these phones? How do you separate out the worthless sludge and crap from the metals you want to recycle? How many fucking phones do you need to just melt down to get even a tiny amount of silver recovery? How do you pay for collecting and melting all these phones, and the refining process, when you end up with a tiny amount of silver after?
Yeah, the PMs just float away...
dupe
China devaluation is good for nations with their currencies devalued. Who cares about US strength, it is not real anyway.
In some benefit to China, they have a great reason to bail out of US T's now en masse, and later down the road introduce gold backing if they choose.
But for now they can sell their products to consumers in the rest of the world with lower currencies.
Keep an eye the Federal Reserve balance sheet numbers. We all know they do off the book transactions, but they might still be doing QE and increasing their balance sheet without anyone noticing.
how gold (and silver) price can rize if every year its mined by the million ouces ?
every year nw it is mined more gold and silver than in all the roman empire
gold and silver are NOT rare anymore
Do gold and silver appear as quickly as humans? Or fiat?
No?
Then they are worth more in fiat all the time. Unlike equities.
Gold and silver may not be rare any more but newly mined gold is practically a wash.
The cost of mining and extraction is hovering around spot price!
Mining for "new" gold and silver is NOT PROFITABLE anymore, just ask CAT.
Is that why the production rizes every year for the past decades?
you are wrong
with the brutal fall of oil price, now the price of
mining gold and silver (dumpster and tractor trucks) is half of 2 years ago
And the ammount of "paper" gold is well over double what it was two years ago.
Winning!
Another fucking idiot...
Mine production has been rising every year during the bull market because projects that were in the pipeline from the 90s early 2000s were finally advanced through development. These mines commenced operations based on economic studies that projected a silver price north of $20 and for many, above $30 per ounce. Or, on base metals by-product output that was also calculated well above the current range. That is why so many mines are now closing, and that is why this year production is DECLINING. The price of oil is helping the bottom line, but the biggest contributor to keep the doors open for most mines is that foreign exchange rates have dropped faster than the price of the metals. If you are mining in Mexico, or Canada, or Australia, the mines report costs in local currency but sell product in US dollars and this alone is the reason some mines have been able to stay in operation by sharply reducing their operating costs.
The problem for the long term is that miners have slashed all the costs they can. Salaries have been cut. Exploration is deferred. Development has been curtailled. Higher grade ore zones are being mined and when they are gone they are gone, because new ore bodies are not being defined fast enough to replace the mineral inventory. That means costs are going to start rising sharply again, and production will still decline for a long time as lower grade ore requires a lot more rock to be mined to produce the same amount of metals.
The final point that all these fucking ZH experts do not account for is that the mining biz is capital intensive. Money has fled this sector and its not coming back for a while. Most companies are dealing with a drought for funding, as they burn through working capital. Operating earnings are not replacing what has been invested to put these mines into production. Write downs have been a recurring theme for the big producers and this has made it even harder for companies to raise more money. A new mine will cost hundreds of millions to develop. Where are all these new mines going to come from to replace the depletion of existing mines? How long will it take to build them?
!
So, I am to understand that China is engaging in GROSS CURRENCY MARKET MANIPULATION in order to justify the dumping all those U.S. Treasuries?
So they're dumping treasuries (Dollars) on the market, and the price of their gold holdings are going up...meanwhile markets all around the world are tanking, hedge funds are going tits-up, more and more companies are defaulting, the middle east is on the brink of a full blown war, oil is plunging, Europe is flooded with unwanted refugees, the people are getting more and more pissed at their respective governments and Lil Kims testing Nukes...
Gonna be a great year folks.
I guess we're gonna need help escaping, are you available?
DaddyO
Yes, and perhaps those overseeing this 'crazy' market correction in China, aren't as 'crazy' as we here in the West are trying to make them seem... what better excuse to dump US Tbills than such a 'market correction'?
Oops!... in our ignorance we crashed the market and needed to dump US Tbills to try and help out...... OOPS... it might happen over and over until we liqudate all of them... or at least most... or as much as we can before the US Tbill market dumps as well.
OOPS! WE DID IT AGAIN!
Any one give any thought to the possibiulity that the Chinese are liquidating FX reserved not to defend their currency but to provide wholesale euro dollars to the banking system amidst a severe credit crunch?
Ok I want to buy some good quality cocaine
do you accept bitcoin or Altcoin, or Litecoin, or Tagcoin, or Fastcoin, Shitcoin ? Crapcoin ?
or can I pay you with my_own_algorithm_just_started_last_night_Coin ?
Contact UBS, they can get you in touch with someone who can answer your question.
My strategy this year: long BTC, phyz, JPY, EUR, 30-year treasuries, and VIX, short absolutely everything else.