The Number Everyone's Been Waiting For: Chinese Reserves Plunge By $100BN - What Does It Mean For Markets?

Tyler Durden's picture

As we previewed on Thursday, the biggest event of the week, and perhaps of the month, was not Friday's nonfarm payroll report, but the January update of China's FX reserves, which the PBOC released last night. The number came out at $3.2309 trillion, down $99.5 billion from the prior month, and $8 billion less than the December outflow of $107.6 billion.

 

And even as China added $3.4 billion to its gold reserves, which rose to $63.6 billion or an increase of half a million ounces to 56.66 million, this reduced the total amount of Chinese foreign reserves to the lowest level since May 2012, and down from the $4 trillion peak in the summer of 2014 when the US Dollar started its rapid appreciation on rate hike concerns, and led to nearly a trillion dollars in Chinese capital outflows. 

 

Recently, an important question that has emerged is for how much longer can China sustain its FX intervention before tapping out and letting the hedge funds win with their short Yuan bets once total reserves drop below the critical redline of approximately $2.7 trillion as calculated by the IMF - the answer is between 5 months and 10 months assuming monthly reserve burn rates of $130BN to $60BN.

That, however, is a bridge we will cross some time in the summer of 2016.

For now  the real question is what does the January Chinese FX outflow mean for risk come Monday's open, and how will it affect markets when they start opening tonight, if not in China which is closed for the week for its new year celebrations.

Recall that in our Thursday preview we warned that according to one of the more prominent bears from BofA, Michael Hartnett, had the reserve outflow come in well below expected, it would unleash a "vicious bear market rally."

This is what we said:

According to consensus estimates, China will report that its total FX reserves declined to $3.2125 trillion from $3.33 trillion: a drop of $118 billion, or modestly higher than the massive December $108 billion outflow.

 

In other words, a reported number below, and certainly substantially below, $118 billion for the January outflow and it would be off to the races as a massive short squeeze will grip all the commodity and materials-linked sectors.

That said, keep in mind that BofA itself had a far more optimistic forecast than consensus:

"We forecast China FX reserve changes and estimate a USD37.5bn fall in January – (USD29.1bn decline adjusting for a negative FX valuation effect). Note that the standard error of the forecast is large at USD24.5bn, which would give us a downside of USD84.5bn fall. We caution that this is guidance and we attempt to be as transparent as possible so investors can gauge the odds in what is a key release for the markets. Note too this is based on onshore CNY FX volumes and our estimate maybe biased down as there are no real time volumes for offshore CNH.

 

And then there was Goldman, because just as a far smaller than expected number would be very bullish, so a far greater outflow would be bearish. According to estimates by Goldman Sachs, not only did outflows not slow down as dramatically as BofA believes, but they in fact soared to an all time high $185 billion in January.

This is what Goldman said: "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." In the last few days, Goldman actually bumped up this forecast to $197 billion to account for valuation adjustments.

 

 

 

This is how we concluded:

So there is your bogey, one which will set the mood for risk over the next month: this weekend, China will announce its January reserve outflows which are expected to decline by about $120 billion. Should the number be far less (ostensibly closer to BofA' estimate of $37.5 billion) expect a whopper of a bear market rally coupled with a huge short squeeze. If Goldman is right, however, with its record ~$200 billion in FX intervention and implied outflows, then all bets are off.

The actual number (whether it is fabricated or not, and since this is China, all bets are on the former) came in at $100 billion, modestly below the consensus estimate of $120 billion, well below the Goldman worst case scenario of $197 billion, and well above the BofA "best case" of 37.5 billion.

Or smack in the middle of a Goldilocksian no man's land.

What does it mean for markets? Ironically, this may have been the most unfavorable outcome, because had China admitted the true severity of its outflows, there would have been a downward flush in asset prices, after which the market could focus more on fundamentals and rise from there with the Chinese capital outflow threat no longer dangling overhead; alternatively, a shockingly small number would have crushed the shorts only to let them re-establish bearish positions after the initial spike higher.

As it stands now, however, what is really happening with the biggest risk factor to commodity, credit and capital markets, remains a mystery, and instead of getting some much needed clarity from China's January reserve number, the world's traders and investors will now have to wait for the February reserve update one month from now to learn if China has managed to slay its capital outflow demons, or if these were just getting started.

For markets, what this means is that the next month will likely be market by more of the same sharp, illiquid volatility that has characterized 2016 so far.

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Mike in GA's picture

When China draws down to their tipping point the last stash of cash is 401ks and IRAs.  Hooboy.

 

Stuck on Zero's picture

Well captain, let look at it another way.  That Capital outflow means China is buying up the rest of the world.

Ouagadoudou's picture

U r right. Chinese just bought some kind of European Monsanto for 43 bilion USD. That's no stupid spending. Game is on

Dubaibanker's picture

100bn is like less than 3% of their reserves...

Plus they bought the largest hotel of America....largest movie studio of America...largest pork food company of America...largest or second largest movie theatre chain of America....the bankrupt Motorola....HQ of JP Morgan being Chase Manhattan Plaza.....plus lots of real estate....and some oil fields.....plus GE's entire appliance unit....and last week also the Chicago Stock exchange...and only 300 Boeing planes!

No wonder they have an "outflow". ;)

Anything else you guys have there to sell?

Call me! :)

in4mayshun's picture

if people like Jim Willie and Peter Schiff are correct and a currency crises is imminent, it seems to me that China would be wise in spending their fx reserves while they still buy stuff.

Soul Glow's picture

They've been buying a lot of gold, which is good, but they've been throwing a lot of cash at equity too, and it has cost them hundreds of billions.

Lots of traders are long over the weekend expecting the FX number to be good.  Not only on WS but day traders here on ZH.  BTFD is dead, it's STFR now.

aPlayer's picture

Does anybody here actually believe these numbers?

ilion's picture

Are there any mainstream brokers where I could buy 2-3 year puts on the value of CNY or HKD which will probably fall together.

philipat's picture

The other side of the same coin. Who is buying all those UST's?

greenskeeper carl's picture

No, most/all on here do not, myself included. But that isn't the point. Its chinese economic data, and therefor it is bullshit, and everyone knows it. Chinese citizens mostly know it, big investors and banks know it, and the chinese government, at least at the top, knows that everyone knows it. Everyone just plays along becasue it is in everyone's best interest to do so.

 

So, if everyone knows the numbers are just made up bullshit, the obvious question is "why are they even relevant?". It is relevent not because it is true, but because the robo-trading algos and big institutional investors still move off the numbers as if they are real. ADMITTED outflows coming in really high, like goldman's 'worst case' above, and markets around the world will tank, big time. But, they put out a lower number, and markets will all rally because the bubble-heads will assure everyone(and the algos will trade like) everything is fixed now, long live the bull. A low number hear means the fiction stays alive another month or so, unless something else happens. Its a consequence of the entire idea of "investing" now being a "live in the moment" kind of thing vs the long term value investing of the past. It doesn't matter if the numbers are all bullshit and everyone knows it as long as we all get to pretend together.

philipat's picture

US Government stats are so much more credible, especially after double seasonal adjustments?

greenskeeper carl's picture

or course not, but this article is about chinese government stats, not US. Which is why my entire post centered on chinese govt data. Perhaps sometime soon ZH will post an article questioning the credibility of US government stats, and I will make a similar post about them since it would be relevant to that article.

No.Fifth.Turning's picture

<<  I don't trust Chinese .gov data

<<  I trust Chinese .gov data

Isy's picture

Why not trust? It's easier to make money these days because of them. :) 

https://www.youtube.com/watch?v=0ml9PdAtYhM

Donald J. Trump's picture

Exacry.  Thanks for compiling the recent in a single post.  Chinese are laughing all the way to their bank.  The real Trump, though not very articulate, is the smartest fucker in the room.

SuperRay's picture

So what you're saying is that when the market tanks and the massive devaluation hits, the big losers will be the Chinese? Is that what's going on?

"Growth" is fucking DEAD!" Unless we cull the heard with Zika/AIDS/Ebola/massive war, their ain't gonna be no growth. The fat lady is clearing her throat...

I went neutral friday, ready to hop on whatever trend develops tomorrow. Why? Because I'm a fucking junkie. I can't escape the thrill of trading. But I've cut back, so I'm doing better. But I'm just rearranging chairs...

Soul Glow's picture

That's fine, so get ready to sell the fucking rip.  Get ready to take a long position in gold and silver too.  We may have seen the bottom.

OregonGrown's picture

"Growth" is fucking DEAD!"

 

This article proves that:  "PAPER" is fucking DEAD" ........ 

Fixed it for you!

Donald J. Trump's picture

The losers will be the ones that didn't get their money out of China in time.

pitz's picture

Don't you mean "into China"?  After all, deflation and debt default in China implies the currency is going much, much higher in the future. 

Mintcoin's picture

Debt default doesn't increase the value. It lowers the value. It makes it worth less. Why would you hold onto a currency that doesn't honor its obligations? It's worthless. It means massive devaluation.

pitz's picture

Private sector users of the currency might not be able to honour their obligations, but that doesn't mean the currency itself isn't honouring its obligations.  Go study the US "Great Depression" in the 1930s.  Plenty of private sector default, yet the dollar was very strong as it was in demand by the debtors to repay creditors.

sun tzu's picture

The Chinese are better off using their USD and UST to buy prime assets now instead of waiting for QE4ever and watching their trillions vanish into thin air. I didn't see them buying NFLX, AMZN, LNKD, or FB. They are buying our infrastructure and food supply.

Kayman's picture

Dubai

Yeah- that did wonders for the Japanese. Buying up high priced foreign assets as their economy goes to hell in a hand basket.

The Chicoms are being played. 

MSimon's picture

Yes. It has been tried before. What China is saying is that it expects American assets to hold up better than Chinese assets in the coming crash.

 

I think Japan sold back nearly everything it bought for about 1/2 what they paid.

monk27's picture

The Japanese are suicidal. The Chinese ain't...

No.Fifth.Turning's picture

There ya' go -- Dubai = Do Buy; BTFD!!!!!!!

Dubaibanker's picture

There is a big difference Kayman.

Japanese never had their own populaiton to sustain any of their overseas assets. Japanese bought real estate mostly and some banking assets.

Whereas China is buying oil and energy assets, Motorola, pork etc for which they have use back home.

As far as hotels and real estate is concerned, China has the billion plus people who can come and use the hotels if no one else does.

Japan and China CAN NOT be compared at all.

When Japanese were big, the rest of the world was stable and growing.

Today, there is only one king of the jungle - the Chinese. No one else is growing or has the cash or has the domestic population and technology to sustain itself in the event every nation has to insulate itelf from any crazy war etc.

People can argue about the Chinese data but so can we argue about the 0.01% growth of EU and US.

No one provides real data any more, but I would trust Chinese data above any one else just because they are still continuing to run a stable ship and have no reason to lie. In fact if they lie, it will be to the downside not to the upside. It is like poker. Cannot show all yor cards until necessary. Who gives a shit if someo people think they are lying! This is how business is done for centuries.

China does REAL trade of USD 5 trillion worth of goods each year out of which it saves itself a half a trillion dollars or so. That is real money that all of us send to China.

If we all wish, we can shut down the Apple factories, car factories, furniture factories, calculator, shoes, shirt and TV factories in China but we simply cannot.

China has us by our balls but they don't even try to squeeze them. Because China knows that we will never leave China because we cannot.

Comparisons to Japan are archaic. Those were different days and the biggest fault of the Japanese was that they did not have enough population at home to sustain any of their overseas assets AND the Japanese never had the factories that China has (built with our money) and has become their tax revenues and reserves (and this is without having any oil etc). We need China more than we ever needed the Japanese.

Chicoms are not being played. They are playing us. But thus far they have not used any leverage on any of us except some soft power.

We need the Chinese more than the Chinese need all of us.

Failing or falling China is a pipe dream. It will never happen.

This is not a capitalist system or something. This is a communist system combined with the best aspects of the capitalist system being run in a very efficient way and mind you, all the time creating millions of jobs (just FYI, China created 10m jobs until 2010 pa, then 13m until 2014 and then 14.5m in 2015 and for the same population size, India has barely created 2m jobs pa since 1990's and last few years is even lower than that)......

Hope this helps...

monk27's picture

There is another difference. The Japanese were tied into and dedicated to the USD system, as result of losing the last war. They've adopted the same FED induced economic theory, with money based on debt issuing, with banking asset values taking priority over people purchasing power, with money printing as an easy way out of a crisis. More importantly, the bankers are in power in Japan, which means that debt is sacrossant (as it's considered a bank asset). China is a different story. The Politbureau could decide one day to just cancel off half of their existing debt, and their bankers will have to comply and writedown the whole thing... Try something like that in America, and you'll have a chance to see who's really in charge !

Manipulism's picture

Dont scare the (american) children.

They ALLWAYs know better.

redc1c4's picture

i remember when Japan bought all sorts of stuff here back when they had an economy...and they were going to rule the roost from then on.

some things never change.

Nexus789's picture

They still have an economy. The may have but the underlying industry is still effective. Compare that to the US which has lost much of its productive capacity.

Donald J. Trump's picture

And the Chicago stock exchange.  So are they dumping FX or just spending it?

Kayman's picture

Trump

Most USD's are being spent to buy up excess Yuan. Hard to keep the Yuan pegged if you don't mop up the yuan that people are trying to get rid of.

Under the proposed meme some are trying to invoke, try thinking this way, the Chicoms are "getting rid of those nasty USD's" while the other side of the transaction are "getting rid of those nasty Yuan."

If you held yuan and thought they were going to decline in value, you would be mighty happy to know the PBOC is still prepared to cash you out into USD's at the current pegged rate.

The game is on and the Chicoms are being played.

pitz's picture

There is no excess  Yuan, dipshit.  The Chinese economy is in deflation, and deflation implies a shortage of Yuan, not an excess.  As defaults kick in on domestic over-investment, there will be an even more severe shortage of Yuan. 

Sorry_about_Dresden's picture

The USA is in the same boat trying to bring back USD to the USA to churn.

http://chinascope.org/main/content/view/7428/76/

Qiao Liang, a People’s Liberation Army (PLA) Major-General

However, once the U.S. exports its dollar to the world, it doesn’t have much money. If it continues to print money, the U.S. dollar will keep devaluating, which is not good for the Americans. Therefore, the U.S. Federal Reserve is not, as some people have imagined, a central bank that prints money irresponsibly. The Federal Reserve knows what “restriction” means. From its establishment in 1913 through 2013, the Federal Reserve only printed US$10 trillion.

Escrava Isaura's picture

 

 

Forget the propaganda, focus at the NEW WORLD RULES:

In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening existing global currency controls, through the IMF.

This would involve a gradual move away from the U.S. dollar as a reserve currency and towards the use of IMF special drawing rights (SDRs) as a global reserve currency.

Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor which would have been a special international reserve currency to be used instead of the dollar.

American economists such as Brad DeLong agreed that on almost every point where Keynes was overruled by the Americans during the Bretton Woods negotiations, he was later proved correct by events.

https://en.wikipedia.org/wiki/Triffin_dilemma

 

So, when the dollar ends its financial hegemony, that most Hedgers can’t wait for it to happen, unfortunately not understanding its consequences what they wish for.

 

Global Observer's picture

This would involve a gradual move away from the U.S. dollar as a reserve currency and towards the use of IMF special drawing rights (SDRs) as a global reserve currency.

Using the IMF's SDRs as a reserve currency is not possible since no country can keep accumulating SDRs at the IMF beyond its quota except when borrowing from the fund and immediately redeeming them in one of the currencies of the basket. 

Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor which would have been a special international reserve currency to be used instead of the dollar.

That is true, but the IMF as it exists now is not capable of performing the role that John Maynard Keynes envisioned for it. For the SDRs to act a reserve currency, members should be allowed to accumulate SDRs when running trade surpluses and the fund should be making unconditional loans to deficit countries (with the interest rate determined by the risk) by borrowing from those running surpluses. Most importantly, as a large external debtor and current account deficit country, the US cannot have a veto at the IMF that it currently has.

That criticism was to justify China ushering in a new international bank on the lines suggested by John Maynard Keynes for the IMF, but not to suggest the IMF as it exists today should be playing that role.

Kayman's picture

Escrava

The Triffin Dilemma is secondary to free-floating currencies. To the extent that the Chicoms need to peg the Yuan to the USD (a fearful child holding Daddy's hand) then they are supporting the USD as the reserve currency.

Let the Yuan float and we shall see who sows the wind. 

Global Observer's picture

 

Let the Yuan float and we shall see who sows the wind. 

Your wish will be granted as soon as the New Development Bank issues its 100% gold backed electronic currency for payment settlements between members, which is due any time this year. When that happens, the US$ will reach parity with the Zimbabwe $ in short order. China is going for the kill, not to prove any point to retards.

Consuelo's picture

+100

 

It isn't who is going to sow the wind, it is who will reap the Whirlwind of (of worthless paper) when the time comes.  And it's coming soon, via U.S. led (Soros & Co.) agitation in Chinese markets, along with geopolitical agitation in China's waters.

 

 

new game's picture

not to mention friends of china:russia, providing oil, and iran providing oil and trading outside the dolla.

3.2.1. reserve currency change, all brought about by abuse of priveldge. we will all look back and say why and how did merica fuck up such a good thing, guess it was a good run...

Diplodicus Rex's picture

A currency collapse should solve the derivatives monster. What will be the value of a financial bet when measured in toilet paper?

logicalman's picture

SDRs - different coloured smoke and different shaped mirrors.

 

Captain Debtcrash's picture

Stuck at Zero, I'd agree, but this capital outflow is being forced, it's not a plan to acquire assets.  At times it can look like they are making sound decisions with their central planning but at times it appeared that way with the Soviets as well.  There have been many like Peter Schiff that think China is going to take over the world, but from an Austrian Economic standpoint they are worse off then we are.  There has never been a credit created boom more wasteful, with more misallocated resources than in China in the recent decades. Its understandable but I think much of Schiff's US bashing stems from the treatment of his father, which is understandable, but it clouds his judgement, so he doesn't see that even though the US is in very bad shape, China, Japan, and the EU, in many ways, are worse.

Stuck on Zero's picture

Compare China to the U.S. China has built cities, massive infrastructure, factories, put a billion people to work, and purchased properties all over the world. With the same amount of money the U.S. has put people 100 million people on welfare, built an enormous government, funded destructive foreign wars, made billionaires on Wall Street, and built useless weaponry.

ParkAveFlasher's picture

The cities are empty, the infrastructure is futile, the factories produce goods for the west, a billion people with farm plots feed themselves, purchased properties at artificially inflated prices, whle the US has truly done all as you say.

So, equally fuqed.  USA USA USA

deja's picture

They've also made their country into a toxic waste dump of monumental proportions.  There will be increasing difficulties in feeding their population and providing enough drinkable water.