Here Is The Reason For January's Selloff: China's January Outflows Soar To Second Highest Ever

Tyler Durden's picture

While China's currency devaluation has, alongside the price of commodities, become one of the two key drivers of market volatility and tubulence around the globe, when it comes to risk, one far more important Chinese metric is the actual amount of capital that leaves the nation.

The reason for this is that as explained over the weekend, in a world where Quantitative Tightening by EMs and SWFs has emerged as a powerful counterforce to Quantitative Easing - or liquidity injections - by developed central banks, what matters for global risk levels is the net effect of these two opposing money flows.

Of all the global "quantitative tighteners", the biggest culprit is China, which has seen over $1 trillion in reserve selling since the summer of 2014, the direct result of a virtually identical amount in capital outflows.

Furthermore in for a "closed' Capital Account system like is China, the selling of FX reserves is a direct function of capital outflows, so the only real data needed to extrapolate not only the matched reserve selling and thus Quantitative Tightening, but also the direct impact onglobal risk assets, is how much capital outflow has taken place.

This takes place in one of two ways: by relying on official Chinese historical data, or by estimating how much outflows take place on a concurrent basis, thus allowing one to estimate how much capital is flowing out in real time. Indicatively, China's SAFE released onshore FX settlement data for the whole banking system (PBoC+banks), suggesting some $97bn of FX outflows in Dec, which is broadly in line with the fall in official reserves.

But much more important is the question what is taking place right now, the answer to which can either wait until SAFE releases January data in several weeks... or rely on day to day estimates of outflows in the form of central bank FX intervention. 

Luckily, we have just that.

According to a Goldman report, so far in January "there has been around $USD 185bn of intervention (with the recent intervention predominantly taking place in the onshore market)" split roughly $143 billion on the domestic side and $42 billion on the offshore Yuan side.

This would make January the month with the second largest amount of intervention since August 2015, and thus the second highest month of capital outflows, and would explain the ongoing deterioration across global asset classes as China's various FX reserve managers have been forced to sell not just government bonds but equities as well. 

Goldman also calculates that "total intervention over the last 6 months, using our estimates, sums to USD 775bn." Run-rating this amount would suggest that nearly $1.6 trillion in Quantiative Tightening is taking place just due to China's attempts to stem capital flight. This number excludes the hundreds of billions in reserves that all other petrodollar and EM nations have to liquidate as well to prevent the rapid devaluation of their own currencies as the world remains caught in the global dollar margin call we first explained in early 2015.

The implications from this are two-fold:

  • For the selling culprit, responsible for the recent market weakness look no further than China, whose reverse "flow" has been responsible for the terrible start to 2016 capital markets.
  • For the Beijing politburo, halting capital outflows is becoming a matter of life or death, because there are only so many liquid reserves China can liquidate before it enters dangerous territory; worse, the less the reserves, the greater the desire will be on behalf of the local population to take their money and run.

Of course, China's rabid defense of further capital outflows means that its original intent, to devalue the Yuan to a degree that boosts its economy via exports, has been put on hiatus, or in other words China is trapped, and instead of an external rebalancing it is forced to boost its economy in the one way it knows best: by issuing ever more debt. However, with China's total debt now estimated at 350% of GDP, it only has a finite amount of time before the debt bubble finally pops as well.

In other words, for China there is, as of this moment, quite literally no way out, and what's worse the longer it delay the decision of how it will reset its economy, the worse it will be for global risk markets.

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Father Thyme's picture
Father Thyme (not verified) Jan 28, 2016 7:58 PM

Take the money and run!

chubbar's picture

OT, but anyone see this story? Didn't think so.

So Iceland forgives everyones mortgage debt and that seems like it would not be of interest to the rest of the world so the press doesn't report it?

__Usury__'s picture
__Usury__ (not verified) chubbar Jan 28, 2016 8:12 PM

Q- how many jews are there in Iceland?????????

A- In 2011, only 50–100 Jews were living in Iceland. They often gather to celebrate the Jewish holidays.


old naughty's picture

outflows into?

If that go to reduce debts, cancellation would shrink virtual liquidity, no?

Not a good sign.

Father Thyme's picture
Father Thyme (not verified) chubbar Jan 28, 2016 8:14 PM

Iceland is the nice kind of place you can have when you don't have vibrant Diversity™.

NoPension's picture

April 16, 20 freaking12 ?!

Been sittin' on that one, eh?

__Usury__'s picture
__Usury__ (not verified) Jan 28, 2016 7:59 PM

IOW, the tribe banksters are blaming the chinks??


Hitlery_4_Dictator's picture

Hey, hey hey, settle down, the proper nomenclature is "slant eyes" or "wobble heads".

Cognitive Dissonance's picture

Imagine what it's going to be like when China really starts selling Treasuries to prevent a uprising and revolution. Hope they have some shovel ready projects on the back burner.

Yen Cross's picture

 It's called "CNO" now?

 Did I forget to mention, that I shorted paper gold almost two days ago, and might add to that position....

nmewn's picture

"Treasonous, unpatriotic bastards!" - Vice Public Security Minister Meng Qingfeng

(Note to self: Get hold of Uncle Wi in the Caymans to see if my funds have arrived.)

Flying Wombat's picture

What we are seeing is a multifaceted, multicausal clusterfuck, not exclusively driven by dynamics associated with China.

Flying Wombat's picture

Pretty good conversation, recorded yesterday:

Gerald Celente: Get Prepped For Global Systemic Collapse

Ethelred the Unready's picture

If the China Fed is selling off its dollar holdings to support the Yuan, shouldn't we start seeing a surplus of dollars somewhere, some place?   Don't the Chinese hold something like $3 trillion in FX reserves?

gatorengineer's picture

My bet is they are being used to buy us stawks... us market is in the best shape relative to the rest of the world.  It's not retail making up the institutionalbum selling.

Ethelred the Unready's picture

Further, if the CPB turns right around and uses those Yuan it bought up to support the stock market, the yuan-dollar  intervention becomes "neutralized".  And the Chinese economy does not shrink its yuan money supply.  

gatorengineer's picture

Trying to understand the story.... so Chinese oligarchs are taking their money overseas....tune of about 1t.  To prop up the yuan those same oligarchs are selling foreign asets and repatriation them to yuan.

Question where is the capital outflow money going?  All California mansions? Doubt it.

InnVestuhrr's picture

A lot of it is going into US treasuries, which is why their prices are so stable in spite of SWF selling.

Wild E Coyote's picture

I see this as something similar to what happened in 1998 with so called ASEAN tiger economies. 

When investors started to pull out of the ASEAN economy, these Foreign investors holding local currencies were forced to sell their holdings very very cheap. 

Thus in my eyes, the westerners who went into China are now being forced into selling their holding of devalued currency.

Losses for investors, profits for China. 


Debugas's picture

what he really meant is that to overthrow Putin the west must offer a Marshall plan for russian opposition

the problem with that however is that russians will not buy it for the 2nd time (1st was Gorbatchev perestroika) and will not trust opposition (especially seeing how ukraine did not improve at all after leadership change)

mallymcl's picture

Can anyone point me to some solid commentary on quantatative tightening that talks through the arguements for and against it? Basically EM central banks are liquidating treasuries to defend their currency - but they are defending it in the first place due to capital outflows back to DMs (ie carry traders). It's more complicated that just that but yeah, anyone got a good piece on this?