Former PBOC Member: "The Situation Is Unsustainable. The Longer It Continues, The More Violent And Destructive The Final Adjustment Will Be."

Tyler Durden's picture

Yesterday it was an editorial piece in the main Chinese media outlet Xinhua. Today, China brings its message of helpless (for now) fury to the FT, where Yu Yongding, a former member of the Monetary Policy committee of the Chinese Central Bank has just said what everyone who realizes that mean reversions after 30 years worth of a "great moderation" can and will be a nasty, nasty thing, thinks. Namely: "the situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be. " He is referring to the relentless recycling of Chinese trade surplus in the form of US paper which is increasingly looking like it will never get repaid. His chief rhetorical question is key: "The question is: what losses is China willing to bear in its foreign exchange reserves in order to slow the pace of the renminbi appreciation?" And that's the ballgame. Just like in Europe the question is what amount of gross economic loss is Germany willing to sustain in order to backstop Europe's insolvent countries (and with an imminent French downgrade looming, it will be the only country doing so in the form of sole EFSF funding) simply to keep the euro up and running, and its export sector humming courtesy of no return to a DEM, so in China the question now is how much risk is the country willing to take with its US-based paper holdings in order to keep its own export sector moving along courtesy of a weak CNY. Ironically, the longer Germany and China pretend all is good, the greater the impairment of their natural import partners. And in a globalized economy, even having the cheapest (no matter how artificially contrived) currency does nothing if the global economy tanks and import level implode. Alas, it will be too late for Germany and China to do anything about their flawed mercantilist policies at that point, as the third and final depression will be here. And what is the right move? The former PBOC member spells it out: "The danger for China is that it does not learn the right lesson – namely, that now is the time to end its dependency on the US dollar." And therein lies the rub.

Key statements from Yu's FT Op-Ed which everyone should read:

Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks. Unfortunately, anger counts for little in international finance. The danger facing the US is that after Tuesday’s debt deal any sense of urgency over a dire fiscal situation will dissipate. The danger for China is that it does not learn the right lesson – namely, that now is the time to end its dependency on the US dollar.


China is worried about the possibility of a US default for obvious reasons. As the largest foreign holder of US Treasuries, either a default or a downgrade would bring huge losses. Even after this week’s debt deal, however, the risk remains that US debt will continue to grow to the point where its government is left with no option but to inflate the burden away. While there is little China can do about its existing Treasury holdings, it can rethink past policies – and ask both how it fell into this trap, and how it might free itself.

Stepping back, the reason for the problem, known to most who follow international finance:

China has run a current account surplus and a capital account surplus almost uninterruptedly for more than two decades. Inevitably this has led to an accumulation of foreign reserves. It is clear, however, that running these surpluses persistently is not in China’s best interests. A developing country, with per capita income ranking below the 100th in the world, lending to the world’s richest country for decades is not reasonable. Even worse is the fact that, as one of the largest foreign direct investment-absorbing countries in the world, China essentially lends money it borrowed at a high cost back to its creditors, by buying US Treasuries, rather than importing goods and services.

To be sure this is not the first time China has jawboned at the US for taking advantage of its symbiotic Mutually Assured Destruction status :

The Chinese government has admitted that its foreign-exchange reserves have already exceeded its needs. It has tried various measures to slow down the growth of these reserves and protect the value of its existing stock. This has included demand stimulation, allowing the renminbi to appreciate gradually and creating sovereign wealth funds. It has also promoted reform of international monetary systems and the internationalisation of the renminbi. Sadly, none of these has worked. With large capital inflows and a current account surplus, China’s foreign exchange reserves have continued to rise rapidly.

The trade off: at what point does the cumulative loss probability offset CNY depreciation gains:

These policies failed because they did not address the real cause of the rapid increase in foreign exchange stocks, namely state intervention aimed at controlling the pace of renminbi appreciation. The question is: what losses is China willing to bear in its foreign exchange reserves in order to slow the pace of the renminbi appreciation?

His conclusion:

One further factor is that any losses in the financial assets held by China will not be realised until their holders decide to cash out. If the US government continues to pay back its public debt, and China continues to pack its savings into US securities, this game may continue for a very long time. However, the situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be.


If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves. Given that many large developed countries are simply printing money (and the recent rumours are that the US might return to quantitative easing) China must realise that it can no longer invest in the paper assets of the developed world. The People’s Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering. To float the renminbi is not costless. However, its benefits for the Chinese economy will vastly offset those costs, while being favourable to the global economy as well.

Naturally, the time for China to strike, if it really means it, is now.

Although the thought experiment of the sheer chaos and market panic that will ensue should China announce it is freely floating the renminbi in the next few hours, is worth the few minutes of daydreaming.

Alas it won't happen now. And certainly not before it is too late.

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Mongo's picture

Now, this will be interesting. Will China put their money where their mouth is...

Highrev's picture

Are you getting ready to buy from the dumb money sellers?


qqqqtrader's picture

He might want to look at these technicals before he buys...

Highrev's picture

Nice work and I can say I agree with your main points like the big level 1261 SPX and that it will most likely hold on the first attempt and that the odds favor a retest of the initial lows (once those are known to begin with). That will be a huge level, and the price action at that point, and on the retest will be huge also.

I was a little confused by your comment that the expanding triangle’s E wave rarely gets retraced. By definition it would get fully “retraced” (and more) every time the pattern resolves in a continuation breakout, correct?

rwe2late's picture

 But China and USA are 'frenemies'.

The relationship is explained here:


bigdumbnugly's picture

is his conclusion anything anyone doesn't already know?

SlipStitchPass's picture

             "is his conclusion anything anyone doesn't already know?"

That is what everyone here is thinking, but I guess it is how the game works. The big pink Elephant has been in the rood for 15years and now everyone decides to point at it and say " holy crap..there is a big pink elephant in the room". There are alot of things that need to be worked out in the final unwind

- derivatives

- global reserve dollars ( and what happens as they all pour back into the US to buy anything not nailed down)

-debt markets - federal, muni etc


- Pensions

- etc etc.


falak pema's picture

Looks lik its gonna be decision time in Eurozone and China with this official knuckle rapping the US has just received, indicating that the Markets now esteem the US administration is totally toothless in being able to bite its own bullet, solve its own debt creation. 

Big, big, moments of global game change in coming months. We are at the brink. And its China and Eurozone that decide their own fate and that of the current world capital markets.

OpenEyes's picture

It's mind-boggling how many crisis are erupting at once!

US downgrade

Euro crumbling?

China sweating that either, or both, of those will unmask their own problems

Swiss central bank interventions

Japanese central bank interventions

And these are just what we are seeing on the surface.  Doesn't take into account the huge derivatives issue lurking in the darkness.  Doesn't include the boiling cauldron of MENA.  

I agree with you re: "Big, big moments of global game change in coming months".. might even be less than months.

I also find very interesting the fact that there seems to be NO consensus among even the most astute observers as to exactly what the implications are going to me come market openings tonight and tomorrow!  I've been reading virtually every article and every comment here at ZH, over at Turd's, Naked Capitalism, you name it, and have yet to really distill a solid prediciton.  This tells me that we really are in un-charted territory!

Hang on to your hats folks.  

InconvenientCounterParty's picture

I predict Yuan de-peg within 3 years and gold to 3000 USD within 5. I'd prefer that no one was prepared except me, but it looks as though some are seeing the support gathering for this setup. QE3 puts us back to 1971.

Chances of a Chinese expansioninst pivot in the next 20 years is 100%. Taiwan is small potatoes. Iran in a hurry to develop nukes? The question you have to ask yourself is why wouldn't they?

oldmanagain's picture

"Middle East shares tumbled, sending Dubai’s index down the most since February, after Standard & Poor’s cut the credit rating of the U.S. for the first time and amid rising concern the global economy is faltering.

Emaar Properties PJSC (EMAAR), developer of the world’s tallest tower, slumped 5.3 percent. Arabtec Holding Co. (ARTC) dropped the most since March after it said second-quarter profit fell 74 percent. The DFM General Index (DFMGI) lost 3.7 percent, the most since Feb. 28, to 1,484.31 at the 2 p.m. close in Dubai. The measure has plunged 12 percent from this year’s high in April, entering a so-called correction. Israel’s TA-25 Index slumped 6 percent, the most since November 2008, at 3:51 p.m. in Tel Aviv.

“We’re playing catch-up and trying to anticipate and price in the response to the downgrade by global markets tomorrow,” said Julian Bruce, equity sales head at EFG-Hermes Holding SAE in Dubai. “The impact on stock prices that we’re seeing reflects the feelings of uncertainty” about global growth, he said."

Boilermaker's picture

The Chinese are shitting thier pants.  What to do with 200,000,000 uneducated young males without a slave wage jobs.

Good luck with that.

Lone Deranger's picture

What to do:  First assign blame - that's easy for the Chinese ruling party.  It will of course be the fault of the US. The now horrible situation should easily fill the ranks in the PLA with millions of new eager soldiers.  The entire country will be ready to get back what they feel belongs to them.  I'm sure that Iran and Pakistan will somehow end up being allies, to take out the "evil beast" lurking in the west.


Boilermaker's picture

Agreed.  Now, just march that army across the Pacific and get us.  Good luck w/ that.  The US still maintains a massive advantage in air and naval power.

Without the ability to invade us, they are fucked.

Lone Deranger's picture

For sure we won't be seeing any Chinese flags being planted in Seattle or LA anytime soon.  I do think a more plausible course of action is to get the US out of their backyard - i.e. Iraq, Afganistan, and possibly the Middle East in general.  They might possibly help the the Iranians with their wet dream to occupy Israel.  There are all sorts of possibilities here...

Chuck Walla's picture

Why fight for them (except as population control) when they can buy them outright?

karzai_luver's picture

You are fighting the wrong war. Don't feel bad , so are 99% of the rest of the lazy sheeple.


Your "massives" will be as useless as they are in Afg.


6 out.


Silver Dreamer's picture

You don't need to invade something you do not plan to occupy. China has plenty of power to destroy us without touching foot on American soil.

rwe2late's picture

What to do:  First assign blame - that's easy for the US ruling parties.  It will of course be the fault of outsiders who "hate us for our freedoms". The now horrible situation should easily fill the ranks in the Pentagon with plenty of new eager soldiers.  The entire country will be ready to get more of what they feel belongs to them.  I'm sure that Iran and Pakistan will somehow end up being part of an evil axis, allegedly eager to take on the self-appointed "global policeman" lurking just about everywhere.

Chuck Walla's picture

No, it will be the Tea Party, 60 guys who just got there in January will be blamed for 50 years of excess - and people will believe it and push that line.

Chuck Walla's picture

I just put a deposit down on a brand new Porsche and mentioned it on Facebook. 

I said, "I can't wait for the new 911 to arrive!" 

Next thing I knew, 4000 Muslims added me as a friend.

Stuck on Zero's picture

200,000,000 uneducated young males without wives and girlfriends!

Captain Benny's picture

Sounds more like 200,000,000 educated young males to be without wifes and girlfriends!

alien-IQ's picture

Isn't there a remarkable similarity between the events that have unfolded in the last 48 hours, and particularly the above statement by the PBOC, and the events theorized in this video?

The Day the Dollar Died

sqz's picture

Thank you very much!

This puts into video effectively what this report details statistically:

Shit's getting real ...

slaughterer's picture

China places a lot of faith in ratings.  Their reaction will be knee-jerk selling of dollars.  It might be the stupidest reaction from a ROI perspective, but they will be selling dollars and T-bills as quickly as possible.  

BKbroiler's picture

This is the exact opposite of the "how China ate America's lunch" article a few weeks back.  Is the China the evil genius that gutted the us economy or the sucker left holding the bag of AA+ hot air?

falak pema's picture

very good rhetorical question!

Azannoth's picture

USA and China are like 2 Siamese twins playing Russian Rulete against each other

karzai_luver's picture

america puked it's guts out all over china again and again.


and then resumed porn surfing and more beers/burrito.


good night.


TaxSlave's picture

This is the exact opposite of the "how China ate America's lunch" article a few weeks back.  Is the China the evil genius that gutted the us economy or the sucker left holding the bag of AA+ hot air?

Well that article was a bunch of mercantilist hot air itself.

Viewing 'China' or 'The U.S.' as a single entity obscures the fact that mercantilist policies always favor fascist corporate government at the expense of the hapless citizenry.

China is in bubble territory, and is ill-prepared to weather a collapse of their bubble coupled with a simultaneous loss of export customers.

Serves them right for inflating along with the U.S. in order to get market share.  Except perhaps maybe the unwitting citizen of China is blameless for wanting to work and feed his family.

The hapless citizens on both sides of this mercantilist game lose out when monetary policy is used as a trade war weapon.

Things are going to get bad on both sides of the pond.  Hopefully the people on both sides will refuse to be used as tools by their mercantilist masters.  History shows that there is not much hope in this regard.  People are taught that freedom doesn't work, every loss caused by the depredations of the predatory fascist corporate state is always blamed on not enough central control, and eventually legions are sent off to die in order to perpetuate that control.

Arguments over which policies to enforce, who should inflate faster, etc. all serve to focus the argument on how much control is needed, and how to exercise that control.  Accepting that set of blinders effectively blocks out the fact that freedom is not even considered.  So the slaves willingly toil for their masters.  And after their wealth is destroyed, their jobs lost, their homes lost, and hunger threatens, they will be all too willing to pour all their effort and might into the military-industrial machine and begin killing with gusto.

The slave-masters on both sides push the buttons from the comfort of their ivory towers, secure in their knowledge that the dupes will never catch on to the game.

A boot, stamping on a face, forever.

Transitory Disinflation's picture

doom doom

coming soon

taking pm's

too the moon.


au, ag

wait and see

apmex is closed to thee

increasing profits for all too see.


like the titanic

there will be panic

then it sank

thanks bernank.


sack the geithner

he tell's thee lies

off with his head

were the cries.


riot riot

hear the disquiet

when is it coming, nobody knows

all we see is the infinite fire hose.


get ye popcorn, see the show

this fiat ponzi is about to blow

grab your pm's, grab your food

Monday morning will set the mood.




Hulk's picture

You're going to scare the children...


working class dog's picture

China and the US commerce department with the corporate elite are responsible for the present situation. You tell china to go to hell!! They have been manipulating currency and enslaving their people ever since the US saved their sorry asses from the Japenese.


Now when their piracy of our technology and methodology is in place they want to bail out. I guess they have learned thier lessons well. Lets see how they keep the billions of Chinese under thier boot over the  next 50years, I dont think so. My dad always told me when I asked him as a child how is it the US is the big dog? He said we are small in number but we do things together better as a nation than anyone else. Of course when my dad grew up and lived in this great country we had a decent educational system that produced critical thinkers, not morns who care for a gubbament entitlement to live. I for one want to get some of the money the gubbament took from me in taxes and social security. I for one despise the extremists on both ends of the US political spectrum who are trying to do what Hitler did, take control of the govt thru the use of taking the debt talks to push their fucked up agenda.

DormRoom's picture

So was Friedman wrong?  Is China the case study in which capitalism does not lead to democracy.  So will American capitalism mutate into its Chinese strain, implying a one party autocracy in which our liberties are slowly eroded?


Oh right, America is a one party system, but its inefficiency lies in the fact that it spends all that time, and resource, convincing the electorate, it's a two party system, unlike the Chinese.


Chinese capitalism: +3 trillion American capitalism: -3trillion

besnook's picture

friedman is as big a quack as krugman.


japan is technically a democracy even as the same party has governed it since post war but it's economy is centrally planned. germnay is essentially the same. russia is centrally planned period but has managed to become one of the strongest economies in the world compliments of oil and gas and of course china is china.

india is a democracy but closer analysis says that democracy has actually hindered it's growth. while that is admittedly a good thing it points out the fallacy of the friedman argument. a centrally planned economy works if the planning focus is dedicated to the welfare of the country in aggregate and allowing micro economies free range in the local domestic economy.

karzai_luver's picture

you got it.

if it's a duck,errrrr golden goose.


TaxSlave's picture

a centrally planned economy works

Uhh, yeah.  Here they are, crumbling before your very eyes, on a scale never before witnessed.

You want your freedom but figure everyone else needs to be controlled in order to secure an advantage for you.  Right.

Here, I'll help you out with some more intellectual ammunition.  Take it, and go forth and multiply:

[Adolf Hitler on Nazism and socialism:] “Each activity and each need of the individual will thereby be regulated by the party as the representative of the general good. There will be no license, no free space, in which the individual belongs to himself. This is Socialism—not such trifles as the private possession of the means of production. Of what importance is that if I range men firmly within a discipline they cannot escape? Let them then own land or factories as much as they please. The decisive factor is that the State, through the party, is supreme over them, regardless whether they are owners or workers. All that, you see, is unessential. Our Socialism goes far deeper . . . .

“[T]he people about us are unaware of what is really happening to them. They gaze fascinated at one or two familiar superficialities, such as possessions and income and rank and other outworn conceptions. As long as these are kept intact, they are quite satisfied. But in the meantime they have entered a new relation; a powerful social force has caught them up. They themselves are changed. What are ownership and income to that? Why need we trouble to socialize banks and factories? We socialize human beings.”


wang's picture
wang (not verified) Aug 7, 2011 12:20 PM

if you are blocked from FT via their paywall try this link

midtowng's picture

The Yuan readjustment is so slow it is barely happening. At this rate China will never decouple in time.

Peter K's picture

You can throw Japan and the rest of Asia and most of Euroland in to the Mercantile bag. As to the bad position of the US, actually it's quite good in the sense that it can slap a 25% to 50% trade tariff on all imports and resolve their trade balance problem overnight. The reason for the present global recession is the boycott of the US consumer and the non existence of the Chinese counterpart.

falak pema's picture

A huge paradigm change you are pointing to there : USA goes 100% protectionist and guts the global economy. Nobody is considering that as a viable alternative...and that makes me wonder...To make it work, it means sacrificing the US oligarchs and their global banks and corporations. Looks difficult with the current ruling class. But it may be down the road if the hard core Tea Party makes headway...

MsCreant's picture

Because of our dependence on others for oil, I don't think this will work.

falak pema's picture

the springs are really springing in your head!

Stuck on Zero's picture

You can't make this up.  Obama gave a speech yesterday in which he stated that the way to get the economy moving was to sign four new trade agreements and extend unemployment benefits.  What is this character smoking?