Here Are The 5 Things China Can Do Next?

Authored by Steven Englander via Rafiki Capital Management,

China has unleashed its triad of asset market weapons as a pre-emptive strike against some of the US trade sanctions rumored to be announced in coming days and weeks. I emphasize the trade angle because it was mentioned explicitly in the Bloomberg story. It is hardly the major issue facing the Treasury market these days. So there was a desire to draw explicit attention to it, even though publicizing China's concerns on Treasury's almost certainly does damage to the valued of its reserves portfolio.

The measures:

1) Indications of backing away from US Treasuries (and quite possibly USD, although not explicit) -- yesterday's move may have been China putting on steepeners in anticipation of the market reaction on publication of the story. The Bloomberg story gave the impression it was high level sources intentionally sending the message, so they were certainly aware of the impact.

2) Dropping the counter-cyclical factor in CNY reference rate quotes. It can be portrayed as a market reform move, but it certainly seems to have had the effect of nudging CNY weaker.

3) Encouraging development of a non-USD clearing system for trade​. This is ongoing. Part of this is encouraging RMB in reserves so as to provide liquidity in trade and trade financing but so far this is limited.  For example, there was a recent announcement, cheered in China, that China-Pakistan trade and financial transactions would be conducted in CNY. At present, Canada and Australia together are four times as big as CNY in global reserves, so they have a ways to go yet. Creating an alternative to the USD-based international financial system is an important political as well as financial goal. They do not want to face a US threat of being excluded from the international clearing system down the road. The rise of CNY in reserves is a good signal of how far down this road they have progressed, but is not the main prize.

The market reaction so far is strongly negative bonds, pretty much globally, and somewhat negative equities and USD.

 EM FX is under pressure, while Europe and JPY are up. The PBoC also managed to get the VIX over 10, something the Fed could not do.

Most analysis has focused on what China is not going to do. The five important questions are what they will do:

1) Having sold Treasuries, what are they buying? Low yielding EUR and JPY assets are not very exciting. They could be buying US bills, steepeners and inflation breakevens, but that hardly comes across as a big political statement.  Commodities are a likely possibility, but in the short term it is more likely they park the receipts from their bond sales in safe G10 assets..

2) How would they measure success? I doubt the US is too worried about USD weakness today. It is unlikely that China could have hedged their bond portfolio completely so China's USD and non-USD bond holdings have probably taken a decent sized hit today.  The best outcome for China would probably be if asset markets sold off short term (as is occurring), but bounce back when China recommits in statesmanlike fashion to being a steady hand in managing the global financial system.

3) How will they react to the rest of the world saying  "Thank you for appreciating my currency, raising my bond yields, and putting downward pressure on equity prices?"  China's move, if pursued or if it unleashes other concerns, could raise questions about the longevity of a bull market that was finally putting to bed the legacy of the GFC, the EZ debt crises and the EM sell-offs of recent years. If their bilateral trade dispute with the US leads to a global asset market sell-off, their case for establishing themselves as an alternative global financial lynchpin weakens. Most likely they take very limited actions, even pull back some of the comments, but imply this is a warning that they can retaliate if the US is too aggressive or irresponsible.

4) Can they afford for asset markets to blow this off completely and yet again 'buy the dip'? For any threat to be credible, the impact probably has to last more than six hours. If there is a wave of market-close buying of assets, any future retaliation would have to be even stronger, and this would carry risks both to China and other countries.

5) Should we follow their investment advice and sell bonds? Setting aside the price of washing machines, we have been puzzled in recent weeks by how complacent markets were in pretty much ignoring the growth and investment consequences of tax reform (they are not big but don't have to be at this stage of the cycle) and the move up in inflation breakevens, while assuming  that the 2018 Fed was steadily drinking dovish kool-aid.

The dramatic nature of the moves in the last couple of days catches the eye, but we have liked the case for steepeners for a while. If inflation breakevens are moving up and you can't name a single major central bank that is not deciding its next normalizng/tightening move, maybe part of the market reaction is just being caught flatfooted in stale trades.

Bonus advice to China: It's easier, cheaper and risks less unwanted spillover to wave USD100k in a trailer park, get a dossier and derail the US government from any significant policy action for another two years. 


Winston Churchill Callz d Ballz Wed, 01/10/2018 - 16:37 Permalink

One good source tells me China has amassed 40,000 tonnes and that Russia has a little more.

Not Wiley,before you ask.That voice is like fingernails on a chalkboard, and he embellishes on

what this guy is telling him.This source does not sell gold either,so he has no dog in the race.

He is a buyer though for his own account,large allocation.

The only reason they haven't acted so far is the destabilization in the markets it would cause.

They would much rather have Uncle Scam take any blame.So they wait.For the inevitable meltdown,

or totally stupid foreign move by the neocons.They won't be disappointed probably .They'd prefer

to negotiate the changeover, but fat chance of that."The American way of life is non-negotiable" as

Darth Cheney said.

Tick tock.Have phyz bitchez.

In reply to by Callz d Ballz

Fireman Wed, 01/10/2018 - 14:57 Permalink

The big flush of IOU Saudi Mercan toilet paper "reserve currency" petroscrip dollah is on. Get ready for the mega tsunami of toxic derivative shit coming home to USSA after all the lost judaic wars in "their" oil patch. Did the anglozionazi punks in Washing town really imagine in all their exceptional hubris that China would continue to underwrite global USSAN slaughter?

How fucking quaint. Now pull that chain and swamp Slumville, Mr Xi!

After damn near a century of global mayhem using blood spattered toilet paper, naturally comes Jim Willie's stinky Scheiße Dollah.…


MK ULTRA Alpha Fireman Wed, 01/10/2018 - 16:25 Permalink

All of the above predictions for China would strengthen the Yuan against global currencies. Why would China price itself out of the export market when the entire Chinese economy is set up as a mercantile export economy. If China loses the 18% of it's export economy, the US market, then China will have a problem servicing debt.

China is dependent on a cheap Yuan for manufacturing exports. The export machine earns over valued dollars to buy raw materials. The Chinese Central Bank will print to keep the Yuan cheap.

A stronger Yuan means more expensive Chinese goods. This would slow China's economic growth. And this doom porn article is repeating an anti-American Chinese government worker even if it's at the highest level, this is meaningless because China has been saying this same thing in the past, it's nothing new. China has sold US debt before and the fear porn freaks jumped on it then. If China sold it's nearly one trillion US debt, Fed Open Market Operations would soak it up over night.

And the 70's petrodollar theory is obsolete. The petrodollar doesn't have the same impact on a $20 trillion US economy. The US dollar facilitates global trade, a global trade which dwarfs the oil trade. Yes, in the 70's, a major portion of global trade was the oil trade, but not now. There are infinitely more holders/users of dollars for global trade than the oil business. This wasn't the case 50 years ago when the petrodollar was set up.


In reply to by Fireman

ted41776 Wed, 01/10/2018 - 14:57 Permalink

why can't we be more communist like china so we can afford to buy luxury real state all over the world and exotic cars? because a "capitalist" middle class is better off than a "communist" one?

rf80412 ted41776 Wed, 01/10/2018 - 16:03 Permalink

It's telling that nobody bothers anymore to defend capitalism in terms of being better at providing for people.  Instead they insist on it for moralistic reasons: freedom in the abstract, efficient markets as an end in themselves, ensuring robust cash flows for the owners of assets, rewarding superior traders, punishing the slow and unambitious, etc.

In reply to by ted41776

roddy6667 ted41776 Wed, 01/10/2018 - 20:19 Permalink

China has not been communist since 1978. Try to keep up. It is easier to start a company and get rich in China than it is in America. Capitalism is rampant in China. 43% of the current GNP is private enterprise. Almost all of the new businesses are private enterprise.

The businesses that are doing well in America are government subsidized, branches of the intelligence agencies (Google), too big to fail, or are not paying their taxes and the government is looking the other way (Amazon, Google, Apple, etc). Socialism is rampant in America. Or is it fascism?

In reply to by ted41776

Cautiously Pes… Wed, 01/10/2018 - 15:10 Permalink

If they 'pull it' too soon, they stand a good chance of getting pulled down in the vortex of our sinking currency. China, and Russia for that matter, know that time is on their side and are not in a huge hurry.

newmacroman Wed, 01/10/2018 - 15:18 Permalink

Buy up as much gold mine reserves as possible to source their petro yuan convertibility. Gold will be white knight after jan 18.

Good bye Uncle Buck peg and largest treasury purchaser. US has just been check mated...

Confucious say Yankee diddled Dandy

Consuelo Wed, 01/10/2018 - 15:20 Permalink



"The best outcome for China would probably be if asset markets sold off short term (as is occurring), but bounce back when China recommits in statesmanlike fashion to being a steady hand in managing the global financial system."


Oh now isn't that rich...   Pot, meet kettle...

JibjeResearch Wed, 01/10/2018 - 15:23 Permalink

The surrounding nations (Russian, Thailand, Japan, Pakistan, ..ASEAN ... and more) soon will do a currency swap with China if they have not done so.  This is a system outside of SWIFT.


If I'm not mistaken, Rus, Thai, Jap, Pak, India have done so.  China will soon end the USD pegged Yuan.  This is when the Gold/Oil/Yuan formally takes place.


Dragon HAwk Wed, 01/10/2018 - 15:30 Permalink

Russia China and The US are playing Monopoly,  Russia is the Smartest, China is in for the Long Game,and USA is the Biggest  Pricks, place your Bets.

William Dorritt Wed, 01/10/2018 - 16:15 Permalink

China wants to be #1


US and Japan have to get out of their way and cooperate with the goal. US Japan alliance is not only tight, it's well armed.

US was led by economic sellouts, with Trump that is over.


Options: "make my day punk"

Hot war with US, China loses big.

Cold war with US, China loses their biggest market, and fails

Bluff the US into Submission, Trump is calling everyone's bluffs, China gets punked.

China throws a tantrum and dumps their US securities to disrupt the markets. Securities get soaked up at discounted prices, firing a blank. For the West it be like eating a bad meal, in a day or two it passes.



China has nothing that the US has to have.

All made in China products can be purchased elsewhere, probably with better quality. I am sure the synthetic narcotics from Mexico are higher quality.

Bringing the factories back to the US creates: 5 million direct jobs, and 20 million indirect jobs at $56-60k per year; and generates huge tax revenues while taking people off of the dole

.....Democrats lose their voting base and China implodes, I call that a good day.



China already lost.

Let it Go Wed, 01/10/2018 - 18:03 Permalink

People are naive if they do not recognize the distinct advantage a state-driven economy has over free enterprise, at least initially. A bit predatory in nature, such a system can quickly exploit the weaknesses of its competitors. It is important we recognize China is a state-run economy based on a business model that is geared to expand by crushing the competition.

Subsidizing those companies working within its system in a multitude of ways helps it achieve this goal. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey. The article below explores the ramifications of this.

 http://China State-Driven Business Model.Geared To Expand html