When 3 Trillion Just Isn't Enough: Analysts Fret Over "Worrying" China Reserve Burn

Tyler Durden's picture




 

“China Finds $3 Trillion Just Doesn't Pack the Punch It Used To,” a Bloomberg headline from Friday morning reads.

“China’s $3 trillion-plus in foreign currency reserves, the biggest such stockpile in the world, would seem to be a gold-plate insurance policy against the country’s current market chaos, a depreciating currency and torrent of capital leaving the country,” Bloomberg writes, before citing a number of sources who say that in reality, $3 trillion aint what it used to be.

“Some Chinese reserves may have already been committed to fund pet government projects like the Silk Road fund to build roads, ports and railroad across Asia or tens of billions in government-backed loans to countries such as Venezuela, much of which is repaid through oil shipments,” the piece continues. “Then there are other liabilities that China needs to cover, such as the nation’s foreign currency debt to finance and manage imports denominated in overseas currencies.”

As we discussed at length on Thursday, Beijing burned through its UST stash at the fastest pace on record in December, liquidating some $108 billion in reserves in a desperate attempt to manage capital outflows and the yuan devaluation. 

"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," we said, summing up the decidedly unenviable position the PBoC finds itself in as Beijing wades into the global currency wars.

“As expectations around the direction of RMB have shifted, so have capital outflows risen forcing the central bank to sell large amounts of reserves to defend the currency – a phenomenon that generates the opposite impact of global QE,” Deutsche Bank wrote, in a note out Thursday. “From this perspective, the ongoing large capital outflows as evidenced by the release of China’s FX December reserves today do not bode well for this year,” the bank warns, adding that its Asia FX strategists "have recently conservatively estimated that there are an additional $300bn of potential to go.”

So given the above, just how precarious is the situation? That is, with capital flooding out amid market-wide confusion over the pace of the yuan deval, soaring NPLs, M2M losses on the PBoC's CNY1.5 trillion stock portfolio (a quarter of which was purchased at multiples of 40X or more), as well as the myriad other factors listed above, one wonders how much dry powder China actually has. 

A simplified way of looking at the situation is presented by RBS' Alberto Gallo, who takes FX reserves, adds an additional 20% of GDP in funds raised from issuing government bonds and compares the total to NPLs, national team losses, losses on SOE bailouts, and capital flight. 

"The Chinese government has some ammunition left, but not that much considering losses already present in the economy," Gallo writes. "Comparing current central bank reserves and headroom to add to government debt vs bank non-performing loans (which we estimate at 15%), potential losses on stock purchases and capital flight over a period of three years, our simplistic comparison below tells you that China’s government dry powder isn’t that much."

And that's probably a generous assessment. That is, it's easy to imagine that NPLs are actually far higher than 15%. It's also conceivable that many more SOEs run into trouble in 2016 than 2015. Then there's the CNY8 trillion wealth management product black swan which could force the government to choose between bailing out WMP investors and facing social upheaval.

Finally, as noted above, the plunge protection national team wasn't exactly bargain shopping during the ill-fated attempt to shore up China's faltering equity market over the summer. Have a look at the following table from BofAML which shows you just how expensive some of the shares were:

The inevitable conclusion from RBS: "Chinese authorities will need to use their ammunition wisely."

We close with a warning from Richard Jerram, the chief economist at the Bank of Singapore:

"The burn rate has been worrying. It’s not about how long it gets to zero, its about how long it gets to about 2, which is what they need."

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Fri, 01/08/2016 - 15:03 | 7018376 Winston Churchill
Winston Churchill's picture

We can lend them some more.

Oh wait....

Fri, 01/08/2016 - 15:06 | 7018387 SethDealer
SethDealer's picture

2016 is the year of the yellow bear

Fri, 01/08/2016 - 15:24 | 7018503 eyesofpelosi
eyesofpelosi's picture

Fire monkey actually...appropriate.

Fri, 01/08/2016 - 15:27 | 7018520 RadioFlyer
RadioFlyer's picture

Fire Monkey Hammer?

Fri, 01/08/2016 - 15:31 | 7018541 813kml
813kml's picture

Fire Monkey Flinging Watery Poop

Fri, 01/08/2016 - 15:49 | 7018623 random999
random999's picture

devaluation is what you want. Why do you spend money to stop it?

Too much mirrors and smoke.. i fucking hate it.

As donald trump would say, disgusting.
Btw, is there anyone else who thinks trump got tired of sucking cock and is now paying of his debt by becoming president?

Fri, 01/08/2016 - 19:55 | 7019723 Kirk2NCC1701
Kirk2NCC1701's picture

More like "The year of the Yellow Fever"

Fri, 01/08/2016 - 16:59 | 7019033 Angel_Eyes
Angel_Eyes's picture

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Fri, 01/08/2016 - 15:08 | 7018399 KnuckleDragger-X
KnuckleDragger-X's picture

The game must be played, but China is discovering the unwritten rules the hard way.......

Fri, 01/08/2016 - 15:08 | 7018401 Janet Shalom Be...
Janet Shalom Bernanke's picture

If China can unwind this fast, imagine how fast it will be for the U.S. to unwind.   

The Fed should allocate a few billion for their bunker.  I bet they already have that in their budget.

and it is an outcome that they actually are modeling.   

 

 

 

 

Fri, 01/08/2016 - 15:31 | 7018509 Winston Churchill
Winston Churchill's picture

They already have one.In a mountain somewhere out by Harpers Ferry.

Fri, 01/08/2016 - 15:11 | 7018417 Demdere
Demdere's picture

No, the issue is what it does to the rest of the financial market.

$1T of US Treasuries sold in a year will have an effect on interest rates, for example.  Those sales are in competition with the US gov's sales of newly-created treasuries and the sales that roll over existing treasuries.

Already, the Fed buys a lot of those, creating money as it does so, which the gov then spends into circulation, devaluing the dollars in your pocket and bank account.

Inflation, according to Shadowstats, is 10%. The important impact is on fixed incomes, shrinking at 10% per year.

Someplace I read a Christmas charity story about a family that picked people at a Walmart to pay their grocery bill.  Lots of people are obviously hurting at the current currency value, more every year.

And that is before the effects of our stock market bubble and Wall Street's skim on pension payouts.

Fri, 01/08/2016 - 15:12 | 7018418 SubjectivObject
SubjectivObject's picture

If 3T is not worth what it used to be, are PMs worth more than they used to be?

Fri, 01/08/2016 - 15:12 | 7018424 K_BX
K_BX's picture

They spent their riches before becoming rich. well done.

Fri, 01/08/2016 - 15:15 | 7018425 Disc Jockey
Disc Jockey's picture

Dear PPT,

Please watch the following video in regards to current market activity.

https://youtu.be/dddR4ZpTDC0

The usual 3:30p EST would be acceptable.

Best regards,

The FED

Fri, 01/08/2016 - 15:14 | 7018427 Soul Glow
Soul Glow's picture

Gonna need quite the 3:30 rampjob to make these worries go away over the weekend.

Fri, 01/08/2016 - 15:18 | 7018455 Bull Bear Nice Pair
Bull Bear Nice Pair's picture

$3.3 trillion to be precise. They also have $21 trillion domestic deposits.

Fri, 01/08/2016 - 15:22 | 7018479 Janet Shalom Be...
Janet Shalom Bernanke's picture

Tyler, 

any news on brokerage firm margin calls?  back-offices must be busy.  Any data on that?

Market trading action looks like forced selling going on.  

Fri, 01/08/2016 - 15:22 | 7018484 buzzsaw99
buzzsaw99's picture

so their trade surplus has disappeared? didn't think so.

Fri, 01/08/2016 - 16:08 | 7018733 desirdavenir
desirdavenir's picture

probably the plan for the US is to import chinese billionaires and their wealth. Just a copy of what has been UK's plan for a long time. Might work on the macro level, though the populace in China may not like to be gotten rid of its nation's wealth, while the populace in the US may not like to realise that they are just obsolete, and that US oligarch have found a new of getting rich without having to deal with stuff like industry, production, engineering. 

 

Fri, 01/08/2016 - 16:54 | 7019005 besnook
besnook's picture

the other data set ignored is 2015 set a record for outside investment in china. if the devaluation scheme works dollars will pour into the country.

Fri, 01/08/2016 - 15:26 | 7018517 SimplePrinciple
SimplePrinciple's picture

<< Poor China, forced to liquidate Treasuries

<< Sly China, with excuse to dump Treasuries

Fri, 01/08/2016 - 15:35 | 7018561 Uncle Sugar
Uncle Sugar's picture

Go ahead China, keep flirting with the idea of a gold backed Yuan.  Mr. Yellen will ruin your whole day.  Just ask Gaddafi.

 

Oh wait.

Sat, 01/09/2016 - 05:55 | 7020963 K_BX
K_BX's picture

at least they bought low and are selling high - thanks to the FED

Sat, 01/09/2016 - 08:02 | 7021110 CitComin
CitComin's picture

I don't understand the down votes on this comment . China is absolutely unloading worthless debt notes domistic and internationaly . Actually producing a surge in the dollar while doing so . It's Brilliant and our military won't be solving this one

Fri, 01/08/2016 - 15:42 | 7018590 thx111
thx111's picture

It doesn'nt make sense that the currency of the country with $3T reserve is weaker than the currency of the country with $T's of

debt.  I guess US has the best printing press in the world.

Fri, 01/08/2016 - 15:46 | 7018612 NEOSERF
NEOSERF's picture

Bet the S&P ends at 1929 today....Hindenburg omen if I ever saw one...

Fri, 01/08/2016 - 15:47 | 7018614 NEOSERF
NEOSERF's picture

Or maybe 1918 when the Spanish flu killed off half the world population...either way, it ain't good

Fri, 01/08/2016 - 20:54 | 7019966 undertow1141
undertow1141's picture

Here's your omen

 

 1922  s&p close          

June 1922 - The emergency decrees under Article 48 of the Weimar Constitution are invoked by the government to deal with deteriorating economic conditions

Fri, 01/08/2016 - 15:52 | 7018641 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

Time to switch to Golden Yuan, let's drop that casino we call stock-market and use those 3 trillions to buy gold and back your Yuan !

Fri, 01/08/2016 - 16:03 | 7018699 Yen Cross
Yen Cross's picture

 China's reserves are overstated.

Fri, 01/08/2016 - 16:07 | 7018723 roisaber
roisaber's picture

What happens if they use their reserves to create a gold-backed currency instead of pissing it all away trying to prop up the unpropupable? Has anybody charted that?

Fri, 01/08/2016 - 16:32 | 7018884 Free_Spirit
Free_Spirit's picture

Absolutely, this is a fools game of losing billions to prop up a currency, especially when they want a devaluation anyway. they should worry less about the stocks and shares and more about just letting the currency settle down to where it needs to be, even if it overshoots.  No country survives currency manipulation for long,  look at the SNB, the UK in 2001, any basketcase economy like Argentina. Russa would be in real danger right now if it had continued trying to bolster the Ruble. China does need to rid itself of excessive foreign currency commitments though so this becomes proportionate to  the currenccy leveel it will find itself at.  Basic economics, they sshould set up a videolink to that Russian woman who runs the central bank, she paid attention in her economics class thats for sure. 

Fri, 01/08/2016 - 17:00 | 7019042 Marco
Marco's picture

All those fleeing billionaires need to be able to exchange their yuan for something more useful, that's what this is about. Their ForEx reservers are being pumped into the hands of the elite and taken abroad.

Fri, 01/08/2016 - 16:51 | 7018987 DrZipp
DrZipp's picture

A trillion here a trillion there pretty soon we're talking about serious mony.

Fri, 01/08/2016 - 16:52 | 7018996 besnook
besnook's picture

pretty soon the chinese will only need dollars for trade with the usa. they buy their oil in yuan/local currency. they have yuan swap agrrements with all their trade partners including japan. they are adjusting their dollar stash accordingly. the yuan is already used in more transactions than the yen and is increasing with a bullet. at what point does the dollar value begin to suffer do to lack of(lol) interest?

Fri, 01/08/2016 - 17:29 | 7019166 oak
oak's picture

this is a better written article, http://www.zerohedge.com/news/2016-01-08/how-low-will-yuan-go-deutsche-b...

pay attention to china’s new trade-weighted RMB index, which is similar to us$ index. china has a plan.

Fri, 01/08/2016 - 19:48 | 7019685 sudzee
sudzee's picture

I thought it was imperative for a reserve currency be backed by massive deficits and impossible to pay debt. 

China just needs a bit more time to outdo the US and Japan.

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