Sorry Europe: China's Pockets Are...Empty

Tyler Durden's picture

As every central banker, politician (except Chuck Schumer), and bank CEO looks towards Chinese central planners as their apparent bottomless pit of dumb money, it seems that perhaps the cupboards are bare. Reuters, via The China Post, highlights in a recent article that while there are indeed reserves, they are gainfully employed and the unwinding of those positions (in size enough to matter) to provide the cash that is so desperately needed to keep the ponzi going, will itself cause a vicious circle of negative sentiment. In fact, analysts reckon China's armory has only about US$100 billion to spare.

Analysts suspect China's forex may be weaker than perceived (Reuters, via The China Post)

Europeans searching for a bazooka to blast away eurozone debt problems might well eye China's US$3.2 trillion foreign exchange arsenal with envy, but Beijing has far less firepower available than many assume.


Most of money in the world's biggest store of foreign exchange reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if sold in size to help Europe, would spark panic on global financial markets.


In fact, analysts reckon China's armory has only about US$100 billion to spare.


“The sheer size of China's foreign exchange reserves is massive, but the actual amount of money available for investing in Europe each year isn't that big,” said Wang Jun, an economist at CCIEE, a top government think tank in Beijing.


A crucial constraint is China's existing holdings of U.S. Treasury securities. Beijing is by far the biggest foreign owner, with an estimated 70 percent of the nation's reserves held in U.S. government bills, bonds and other dollar assets.


Turn outright seller and the market value of the remaining holdings is likely to plunge.


That's not a great investment strategy given the Chinese public's unhappiness about the roughly 38 percent decline in the nominal value of the dollar in the last 10 years.


The government also may have to set aside some foreign exchange reserves to bailout the banking system if piles of loans to local governments and the property sector turn sour.


China injected nearly US$80 billion in reserves into its big state banks from 2003 to 2008 to help them clean up their balance sheets so they could float shares.


Shrinking Exports, Smaller Surplus


Meanwhile, China's trade surplus, essentially the money it has to invest overseas, is shrinking as Beijing does what critics in the developed world have been urging for years and rebalances its economy away from exports.


Imports surged 28.7 percent year on year in October and the surplus of US$17 billion was well short of the US$24.9 billion forecast by economists.


Beijing holds an estimated one-quarter of its reserves in euro-denominated assets, so keeping that steady implies a US$117.5 billion increase this year if the country's foreign exchange reserves grow by the US$470 billion estimated in 2011.


That's roughly the amount economists expect China to invest in Europe in 2012.


“Assuming the FX reserve accumulation does not slow significantly, I think China will put at least US$80-100 billion in euro assets per year in the next two years,” said Wei Yao, China economist at Societe Generale in Hong Kong.


China recycles foreign exchange assets into overseas investments so outflows of cash roughly track inflows.


The build-up in FX reserves, a result of the central bank's intervention to limit the yuan's appreciation, tends to fuel inflation pressures even as the central bank issues bills to mop up the amount of local currency it pumps into the economy.


And it explains why foreign reserves cannot easily be used for domestic spending on infrastructure or shoring up pension systems, since simply converting the cash risks driving up both inflation and the value of the yuan currency.

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TruthInSunshine's picture

China is going to bail out Europe. Don't fret, peoples.


It looks like China, via the PBOC and given the galactically weighty levels of fraud, graft, NINJAS (loaned to the hilt in every province), and its merry central planning, ghost city developing, buying commodities at nosebleed levels ways, is naked, too.

Go beggar thy Myanmar & North Korea, bitchez.

*But go long Chinese real estate. They're not making any more of it, and I especially like Trump Towers designed by Bang Dae-Ho in Guangdong Province as a quick way to flip for fiat.

DormRoom's picture

by bailout you mean buy out European assets in Africa, usiing its Euro reserves, when shit gets reall, then yes.


If China plays this right, it can control the resources necessary to be a uni-polar superpower, without war. 


The goal of war is to get you in a better position for the next war.  If an economic collapse provides you with the same opportunity, you take it.

TruthInSunshine's picture

Yes, China will control the roughly 6% of global oil supply that is in sub-s Africa, while the U.S. & other Western Powers control the remaining 94% (including about 50% of total global oil produced by being the protectorate of OPEC nations).

China is brilliantly idiotic.

The next thing they'll do is subsidize industries producing revenue losing products to be exported (wait, that's already happened).

halflink123's picture

oil is a commodity and it makes no difference who "controls" it.  They only thing that controls anything is cash. 

TruthInSunshine's picture

It sure as hell makes a difference if it's priced in USD

halflink123's picture

I think most people who babble on about gold don't have the slightest clue what they're talking about. I have yet to hear a coherent argument for why gold should equal M3 or why platinum is not as good a monetary metal as gold.  Noone ever - ever talks about platinum for instance.

And I never said anything about how oil is PRICED (USD vs gold).  I said that oil "owners" cannot get it cheaper than oil importers, because oil is a commodity w/ one global price.  So it's inaccurate to say that since US has hijacked 95% of world's oil (which can't be right anyway b/c of Russia), China will have to pay more per barrel than U.S. Just not true b/c it's a commodity.

merizobeach's picture

"Noone ever - ever talks about platinum for instance."  Pipe down, Halfie.  You've been here for a year but haven't paid much attention?  Platinum is problematic because the supply is very low, and the price is volatile (check the 10-year chart on Kitco).  It's use as an industrial metal, with palladium, have reduced global stocks beyond a point which they can be distributed sufficiently to be used as currency.  Incidentally, the tremendous suppression of silver prices over decades has served fiat-printers' interests by facilitating a similar reduction in global silver supplies into industrial purposes, thereby reducing the available metal for bullion and coinage, as they have attempted to de-monetize it for the stability of their paper by eliminating an historically important alternative.

Diogenes's picture

A large number of the world's oil wells and their output are owned by the big oil companies under contracts signed years ago, by which the actual owners of the oil (sovereign governments and their people) get a tiny royalty payment which was fixed at a low figure when oil was a lot cheaper than it is now.

TheRagingTory's picture

You assume free and fair trade.

Which is rather unlikely.

If the US actualy occupies the oil states, its could happily pass an oil export law that allows oil to be exported only to certain nations, on certain ships, it could fix the price, it could have several fixed prices, so the US pays $50 a barrel, EU pays $150 per barrel and China pays $450 a barrel.  The US could charge the oil states for the occupation and they could pay in oil, or dollars, which the the US uses to buy oil.


halflink123's picture

No, my point of view stems from the fact that oil cartels HAVE NEVER WORKED.  Everyone blames OPEC for high prices, for instance, but OPEC is a total failure.  No one has ever been able to price fix the oil market.


But for the sake of argument let's assume that the U.S. can fix prices in such a way that the U.S. gets oil at $100/barrel and China at $500 a barrel. I think this is impossible, but let's assume this happens.


In the short run this might have some effect on China but it will quickly find oil alternatives, i.e. coal, electricity, solar, etc.


Personally I think this displays the outright idiocy of U.S. foreign policy-the market will always find the cheapest sources of energy.  Oil is only in such high demand because it's currently still one of the cheapest and most convenient sources of energy. But when oil declines enough or runs out entirely, the market will reward other energy sources, be they solar or whatever.  


Re: platinum.  So you're saying only non-volatile commodities can be used as money?  If so check out the chart of gold between 1978-1982.  Pretty volatile, huh?  Re: gold price suppression etc.; almost everything is almost always tried to be gamed, be it suppressed or inflated-stocks, gold, silver, oil, beanie babies, rolex watches, antique cars.


But my question also is why people use M3 rather than M1 or M2 when comparing it with gold and also why they COMPLETELY ignore other metals that have HISTORICALLY been monetary in nature, i.e. silver, platinum, palladium, copper, nickel, and so forth.   Something could be said for removing the industrial applications of these metals from the equation, but no one has even done that.  Hence I have yet to hear a coherent argument on this topic.

I think I need to buy a gun's picture 


first slow then it happens fast.........complete collapse ninja style

The Limerick King's picture



The Union is in quite a stew

Just what in the world will they do?

Things could turn sunny

With China's dumb money

"So sawwy...,but no wontons fo yu" 

TruthInSunshine's picture




For a brief spell I tried to match wits with you

My ego whispered "smart limericks can't be that hard to do"

After failing because my prose horribly blew

I've moved on and accepted what's true

With you, don't get into a limerick duel

I've now burned my last piss-poor batch of rhyme fuel


4realmoney's picture

I find it rather amazing that few people "care" that China is a communiist givernment and the immorality of that idealogical system. Hasn't anyone ever read Animal Farm? Growing up in the '80s, the thought of doing business with the Russians was unthinkable under the same pretext. Celente touches on this well:

FrankDrakman's picture

China is as communist as the US is capitalist, you moron. China is a totalitarian protection racket, run by a bunch of ruthless old men unafraid to use the world's largest standing army to quell dissent, but willing to let a few people make some serious coin, so as long as they get a rake off the top. The US is a crony corporate state, where the rich and well connected rape any and everybody for what they can, while tossing a few crumbs, like Medicare and Social Security to the masses.

Ideology - note the spelling, simpleton - is dead. It rarely survives the revolution. That's the lesson of "Animal Farm". The bigger lesson, which is taught in "Nineteeneightyfour", is the people with guns and power always win. Here's the salient quotation:

If you want a vision of the future, imagine a boot stamping on a human face - forever.

The US was once a rebuke to this notion, but what once was, now is no longer so.

wisefool's picture

which of the following phrases most accurately represents the classical imagery of a boot to the face:

In the USA there will be a potentate election in 2012. your choices are:

  1. A billionaire
  2. who pays less effective taxes
  3. than most single moms so / vs.
  4. encumbant wins no matter what

Yes, this is a Tyler sanctioned IQ test question on the subject of Democracy. Chose wisely.

Diogenes's picture

More like a boot to the nuts HA HA HA HA HA WWINNING!!!!! (Goldman Sachs quote unquote)

Ropingdown's picture

Stuns me too,  that people ignore the fact that corporations have been able to blithely sub in chinese labor for US and Euro labor.  When I was in RVN, I Corp and Laos, risking my life to, laugh, stop communism, Kissinger and Nixon were already cozying up to the very murderous bastards whose proxies I was ordered to fight.  The corporate CEO world was enormously anti-communist...until they weren't.  "No, no, China is really capitalist, with a remnant communist party."  China was bad right up until it was the solution to inflation and global competitiveness of corporate manufacturing.  And low, the same thing is happening in both worlds now, East and West, that you can have a career or business with politically correct opinions (based on your customers and suppliers views) or you you can have political views which are free, but you cannot have both.  If I become pro-Chinese but rigidly capitalist and against dissent, I'm fine in the eyes of the FBI and the DHS.  Figure that one out and you'll see where we've gone.  Things have changed.  For this our fathers fought the fascists?

Michael's picture

China knew it couldn't win, so it went balls to the wall with its housing bubble on steroids. You know, if you can't beat them join them strategy? Nice call China. At least it got a lot hard assets out of the deal.

halflink123's picture

"Buying commodities at nosebleed levels"-are you referring to gold?


Or is gold the only commodity not capable of reaching nosebleed levels, ever?

HelluvaEngineer's picture

$100 billion?  Excellent.  That's exactly how much we need next week!

centerline's picture

Paycheck to paycheck baby. Its all about the next fix.

redpill's picture

The global forex balancing act has become a giant game of Jenga that is getting quite long in the tooth.  China knows better than to try to pull out one of the sticks at the bottom.

ziggy59's picture

Sing to the Beachboys classic..
And we will print, print, print, 'till my daddy takes my printer awayyyyyyyyy.

YesWeKahn's picture

When the creditor goes broke, the world is ending.

GeneMarchbanks's picture

Well, the debtor can't pay so in our system that makes them... ? In need of new debt. Repeat as necessary.


TruthInSunshine's picture

Confucious say:

He who lay down with The Bernank wake up with wicked case of tapeworm.

CClarity's picture

China is patient.  Its plan was for the rest of the world to get too far over their skis.   It's gonna hurt on the mainland, but not as much as it's gonna hurt in Europe and North America.  Patience will be rewarded for the dragon.  Look to the Pacific as the arena for 2000-2100.  It's still very early in this new paradigm.

Also, the $100B is another example of why the US$ liquidity crisis is upon us and counterparty craziness is increasing.

sushi's picture

Where's the deer?


SheepDog-One's picture

The bucket comes up from the well...dry.

Commence WW3.

TruthInSunshine's picture

It puts the lotion on its skin lest The Bernank gives it the hose again.

[This Mortal Coil blares in the background]

wandstrasse's picture

This Mortal Coil

It'll end in tears.

ziggy59's picture

Dig your well before you thirst...

sabra1's picture

that's why oBLAHma placed troops in australia to cut off the supply of minerals to china. ditto in north africa, oil supplies from the middle east!

SheepDog-One's picture

Its all spread too thin now...sure they were able to go into Egypt and Libya but now a very tired military is to take on China and Russia? Theyve overplayed their hand here by a wide margin.

merizobeach's picture

"Very tired military"?  Surely, there are still ever-more hordes of stupid & brainwashed (and unemployed) 18-year olds who are ready to strap on a cock and go rape the world for Uncle Sam.  And surely, at +5% per annum, DoD funding hasn't dried up.

DosZap's picture


BINGO!!!!!!!!!!!,ve haf a vinna!!.

Checkmate!..............we are doing, have done stupid crap, but NO one is going to get to take a free ride on all the good resource spots,w/out Sammy/Unca putting in a new Military presence, or agreement.

Point, Counterpoint, just like Chess.Your move.

marcusfenix's picture

and the hits just keep on coming.

economic gravity is a bitch, isn't it?

GeneMarchbanks's picture

 'China recycles foreign exchange assets into overseas investments so outflows of cash roughly track inflows.

Interesting, so how are those 'overseas investments' doing? Not to mention that domestic real estate.

Richard Chesler's picture

Traveler's dilemma.

Mark it zero!


BennyBoy's picture


Oh that's right, we already pick pocketed them.

Lux Fiat's picture

Michael Pettis wrote an article on the desire by some to see China bail out Europe and why it' not going to happen anytime soon.  A good companion piece.

Mark123's picture

good article...thanks....the following comment is perfect:


"But if Europe is asking China to lend into a fund that is effectively guaranteed by Germany, then there shouldn’t be much Chinese reluctance.  In that case however I would have to wonder why Europe needs help from foreigners.  Germany has little difficulty in borrowing on its own."

catacl1sm's picture

Uh-Oh. Shark Fin patterns on the S&P!

FrankDrakman's picture

No worries in Toronto then. We banned shark's fins, eh?

KickIce's picture

So dump some US Treasuries, what could go wrong?