China Blows $99.5 Billion Defending the Yuan in January
China has blown about $1 trillion in US reserves defending the yuan from capital flight in the last year. Nearly $100 billion of that reserve outflow came in January. Let’s s take a look at the results in pictures.
Intervention Results in Pictures
Interventions Don’t Work
From 6.214 to 6.569 is a 5.4% decline in the yuan relative to the US dollar since August.
China’s intervention has not accomplished much of anything other than blowing currency reserves. In general, currency interventions don’t work.
China’s Dwindling Reserves
The BBC reports China’s Currency Reserves Plunged in January
China has been running down its vast foreign currency reserves in an attempt to boost the value of its own currency and stem a flow of funds overseas.
At $3.23 trillion, China still has the world’s biggest reserve of foreign currency holdings. But that has declined by $420bn over six months and stands at the lowest level since May 2012.
Many Chinese businesses hold debt in dollars and managing those debts with a severely weakened yuan could cause problems and some companies to fail. So China has been trying to engineer an ordered devaluation of the yuan, but that is proving hard to deliver.
Investors have been trying to pull funds out of investments priced in yuan and speculators have been betting on further falls in the currency.
To stabilize the situation China has been selling dollars and buying yuan.
Prop Job Unsustainable
China still has over $3 trillion in reserves, but it cannot continue burning them up at the rate of $100 billion a month or they will be gone in less than three years.
On August 11, 2015, China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record.
That surprise devaluation was supposed to be a “one time” affair with the yuan subsequently stable. In August, following the devaluation, I received a reader question: Is China a currency manipulator?
Of course China is. So is the Fed, ECB, bank of Japan, and every other central bank.
China and the National Bank of Switzerland manipulate their currencies with pegs. The ECB, Fed, and Bank of Japan manipulate currency with interest rate interventions and QE. The Bank Japan also intervenes directly.
Mike “Mish” Shedlock
if you overpaid for commodity raw materials that go into your goods and the marginal profit on those goods went down since the yuan is tied to the dollar and dollar strengthened relative all other currencies you have very few options.
manipulating the exchange rate in this case is an attempt to bring liquidity to firms that have inventories that are essentially worth-less but need to be liquidated even at a loss to bring back some sort of real capital. the failure here is that all the actors, the businesses, the banks, government provincial and others are set on a course that would not resolve the underlying problem. it is an attempt to manipulate prices by pushing down purchasing power to liquidate inventories via exports. all this creates a blow-back effect of not having capital to re-enter certain industries or supply chains if there is a dynamic shift in raw material costs and logistics. in some sense they are attempting to destroy long term capital to preserve short term liquidity, it is possible but every factoring outcome has its’ price.
The decrease in reserves are due to Fed posturing started in last summer and instigated hot money repatriation and speculative portfolio shifting y locals has nothing to the with the level of exchange rate. Thecurrent rate level still creates 500 billion trade surplus.
I am glad to see your new blog showing up in the news section of finviz.com
China doesn’t need reserves. They are a significant and chronic net exporter, with a massive surplus of export capacity when their appetite for imports accelerates. The Yuan is set to go much higher in the future as global currencies rebalance themselves. China is using their reserves to acquire overseas assets at the peak of valuation in the USD$, rather than defending the Yuan. Deflation inside China is highly supportive of the Yuan and the Yuan is likely to surge substantially in coming years.
The yuan is going nowhere but down.
China will have to paper over a LOT of NPLs.
Also, (international) Investors no like capital controls.
There is at least that much leaving China every month via inflated Letters of Credit wherein the Chinese importer is buying inflated price goods and subsequently the seller shifts the (inflated-actual) price difference to the Chinese’ foreign account. Billions is being spent monthly on west coast/Canada real estate this way.
Except that almost no “Chinese money” is showing up in Canada, nevermind in Canadian RE.
Are you kidding ? The entire west half of British Columbia is being bought, daily, by Chinese. 1 1/2 million dollars for a Kamloops shack isn’t because it’s “good” in the oil patch.
No, not kidding at all. The topic has been researched extensively, and transactions by Chinese nationals in Canadian RE are quite minimal. Don’t confuse Asian-ethnicity Canadian citizens for being “Chinese”. What is happening in Canada is just like what happened in the USA circa 2003-2005 — a speculative credit-induced RE bubble which will end in a fashion similar to that of the USA with substantial deflation. Chinese are being portrayed as scapegoats, which is highly unfortunate and xenophobic.
Also, you are severely exaggerating the bubble that exists in BC. It mostly is in Vancouver proper, and prices stopped going up 2-3 years ago for the most part. Housing in other communities is actually quite reasonable in comparison, and downright cheap in places like Prince Rupert where nobody suffers delusions of credit-bubble-induced grandeur.
Mish,
Why does it matter if China runs down their reserves over three years? They were amassed due to maintaining a lower than true exchange rate, therefore exacerbating their trade surplus over the last 3 decades. Now they are just being used to defend a rapid decline in the exchange rate, due to increased capital outflows. Surely that is the whole point of foreign reserves amassed under pegged exchange rates….?
It’s not as they can really do anything else with those reserves.
If China blows all of its reserves and capital flight continues China will be in a huge world of hurt. It will make matters far worse.
It is blowing through reserves fighting a losing battle. Smart policy would be to step aside. Hell China should float the yuan and let it go where it wants to go
Mish
This title should be “China Blows Through Another $99 Billion of Reserves in January”. The reserves are not being wasted. People surmise that China wants to control the reserve currency, a currency backed by gold (and silver), but wonder how China will do this or when since the Billions they hold in US Dollars value would drop dramatically, and be unwilling to loose that stored value. I believe this is the avenue the Chinese will take to relieve themselves of a dying US reserve currency. I believe, the Chinese are not only using their reserves to “boost the value of its own currency and stem a flow of funds overseas”, but I believe they are purchasing gold (and silver) in large quantities.The article just gave us the timeline for the US dollar to collapse, 3 years. I believe by that time, China (India and Russia) will have cornered the gold market. China has a good chunk now, and will have more when they get Venezuela’s gold. China loaned Venezuela cash to operate about a year ago. Venezuela will fall or has fallen, and China will take in payment for their loans in oil and gold. I believe Venezuela’s gold is as good as in the hands of China now. We (US and the world) have 3 years to position ourselves for the ultimate demise of the US dollar as the reserve currency.