A reader pinged me the other day about China “dumping” US treasuries.
I responded, “dumping” does not properly describe what’s happening. China did not sell US treasuries because it wants to get rid of them. Rather, China’s reserves plunged because of capital flight. China is doing all it can to stop capital flight and shore up the value of the yuan.
China has tightened capital controls a couple of times, but so far, it hasn’t worked.
China’s Foreign Reserves Drop Most in 10 Months
Bloomberg reports China’s Foreign Reserves Drop Most in 10 Months as Yuan Slumps.
- Reserves decreased $69.1 billion to $3.05 trillion in November, the People’s Bank of China said in a statement Wednesday
- That compares with the median forecast of $3.06 trillion in a Bloomberg survey of economists
- Decline was biggest since reserves tumbled $99.5 billion in January
The fifth-straight monthly decline brings the reduction in the stockpile to almost $1 trillion from a record $4 trillion in June 2014. While authorities have begun tightening capital controls, a $50,000 limit that Chinese citizens are allowed to convert from yuan annually will reset at the start of the new year, potentially adding depreciation pressure on the currency.
“A combination of yuan weakness and a peak in the mainland property sector is conspiring to increase capital outflows,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report. “Another month of falling reserves does little to inspire confidence, especially as households await the renewal of their FX quota at the start of 2017. Even so, with the yuan steady so far in December and capital controls in place, there’s reason to hope China’s reserve buffer will end the year on a more stable note.”
“The announcement of additional capital controls will smooth the fall in reserves for some time but won’t solve the problem,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. “China isn’t out of the woods.”
“I smell more capital controls, which run against any hopes of reform or internationalization of the yuan or a sharp drop in the yuan,” said Michael Every, head of financial markets research at Rabobank NA in Hong Kong. “And all these fun and games come before we have even seen President Trump.”
Capital Controls on Insurance
One of the ways corporations have been getting money out of China has been via insurance schemes.
In response China Clamps Down on Insurance Companies’ Buying Spree
Chinese regulators have intensified their crackdown on insurers’ use of high-risk, high-return products, which are often used to fund corporate deals.
The clampdown comes days after the country’s securities regulator separately denounced companies making highly leveraged takeovers as “barbarians” and “robbers”.
The China Insurance Regulatory Commission on Tuesday said it had barred Foresea Life Insurance from issuing “universal insurance” products.
Regulators have become increasingly wary as Chinese insurers have made a series of highly leveraged acquisitions in recent years. Such concerns were believed to be part of the reason Anbang Insurance withdrew its $14bn bid for Starwood Hotels & Resorts.
“If you use funds from questionable sources to undertake highly leveraged buyouts, and turn from an [industry] stranger to a barbarian, and finally become a robber, this is not acceptable,” said Liu Shiyu, head of the China Securities Regulatory Commission, in a weekend broadside.
Earlier this year, the chair of the CIRC warned against insurers, awash with cash from universal insurance premiums, becoming “automatic teller machines” for takeovers.
Buying Sprees About to Hit Brick Wall
The Financial Times reports on the Buying Spree Behind Beijing’s Investment Curbs.
The days when a Chinese iron ore miner could buy a UK video game developer are drawing to a close as Beijing tightens up on cross-border investment by its companies.
Investment banks in Asia have worked overtime this year on bringing an expansive range of acquisition targets to aggressive Chinese groups, many of which have strayed far beyond the acquirers’ original scope of business.
According to commerce ministry data, overseas purchases by Chinese companies have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn over the first 10 months of 2016.
The spree in the past few years has seen an airline buy a financial services business, an insurer move into the global hotel industry and a shopping centre developer purchase a blood bank. Most notably, Shandong Hongda, a lossmaking Chinese iron ore miner agreed to buy UK game developer Jagex earlier this year.
The State Council plans to issue a circular that will tighten regulations on Chinese groups that acquire overseas companies that have little to do with their core business. Such acquisitions worth more than $1bn would not gain regulatory approval, according to two people that have seen a draft of the document.
It has also proposed stricter approval requirements for cross-border deals worth more than $10bn and on state-owned enterprises investing more than $1bn in foreign real estate, according to the two people.
“There have been a lot of deals that don’t make strategic sense. [A crackdown on capital controls] would be a reaction to that,” said a senior M&A banker based in Hong Kong.
One Hong Kong-based lawyer said that Chinese regulators such as the State Administration of Foreign Exchange had recently increased the time it took to process applications, effectively killing some time-sensitive deals. In some cases “they don’t reject the application, they just don’t respond”, the person said.
Deals Refused for Thee Not Me
Despite capital controls, HNA-Ingram Deal Lifts China Offshore Acquisition Fears.
Bankers working for China’s HNA Group have been buoyed by the successful completion of its $6bn deal for US technology group Ingram Micro — indicating that other pending acquisitions of overseas assets will not be blocked by restrictions on moving capital offshore.
HNA’s Ingram deal had been awaiting approval from China’s State Administration of Foreign Exchange. But it was thrown into question by new State Council restrictions on Chinese groups buying overseas companies in areas outside their “core” business.
Any noncore acquisition worth more than $1bn will now be refused regulatory approval, according to people who have seen documents on the new rules.
This clampdown is intended as a stopgap measure, in response to $146bn of outbound investment by Chinese companies in the first 10 months of 2016. Regulators have publicly stated they will crack down on so-called “fake deals”, or transactions designed to move capital offshore.
As a result, bankers had been worried as to whether Ingram’s technology supply chain operation in the US could be deemed as “core” to HNA, which is a Chinese conglomerate built around an airline business.
HNA has remained confident. Earlier this week, the chief investment officer of one of its investment arms was quoted by Reuters as stating that restrictions on cross-border investment would impact some of its Chinese competitors — but not HNA itself, which might even benefit from having fewer rival bidders.
Nuclear Option Nonsense
The idea, widely promoted at times is China holds some sort of nuclear option threat of dumping its treasuries.
It’s a theory stressed by hyperinflationists, and it’s nonsense. I discussed the nuclear notion at length on July 30, 2010 in Should China Dump Dollars for Commodities? What about the “Nuclear Option” of Dumping Treasuries? Can Global Trade Collapse?
Check out this spot-on prediction of Michael Pettis who I quoted at the time.
An awful lot of investors and policymakers are frightened by the thought of China’s so-called nuclear option. Beijing, according to this argument, can seriously disrupt the USG bond market by dumping Treasury bonds, and it may even do so, either in retaliation for US protectionist measures or in fear that US fiscal policies will undermine the value of their Treasury bond holdings. Policymakers and investors, in this view, need to be very prepared for just such an eventuality.
… the idea that Beijing can and might exercise the “nuclear option” is almost total nonsense.
In fact the real threat to the US economy is not the dumping of USG bonds. On the contrary, in the next two years the US markets are likely to be swamped by a tsunami of foreign capital, and this will have deleterious effects on the US trade deficit, debt levels, and employment. Investors and policymakers should be far more worried that China and other capital exporting countries are trying their hardest to maintain and even increase their capital exports, while the capital importing countries are either going to see capital imports collapse, or are trying desperately to bring them down.
So why not worry about Beijing’s “nuclear option”? For a start, unlike you or me the PBoC cannot simply sell Treasury bonds, pocket the cash, and go home. Dollar bills are just as much obligations of the US government as are USG bonds, only that they pay no interest. If the PBoC wants effectively to reduce its holdings of USG bonds it must swap them for something else.
I cannot take credit for that. It was written by Michael Pettis. The link I have is no longer valid so I cannot point to his complete article.
China accumulated a massive amount of US treasuries. I have long stated the money must return and it would via China buying US assets. China went on a US buying spree: properties and corporations.
Now China appears to want to stop that, and the US is increasingly worried about China acquiring technology companies and trade secrets as well.
On November 17, 2016 CNN Money reported U.S. panel wants to ban China from buying American firms.
The U.S. commission, which provides non-binding recommendations to Congress, is accusing Beijing of using its huge state-owned enterprises (SOEs) as tools to advance national security goals.
Sorry Charley, one way or another, those dollars will return, buying US assets. It’s the price we pay for running a trade deficit with China.
US Dollar/Yuan Weekly Chart
As a result of capital flight, the Yuan has weakened against the dollar for nearly two years, exactly the opposite of what hyperinflationists figured would happen.
This poses a problem for Trump, who thinks the yuan is too low. Trump also accuses China of being a currency manipulator.
The irony in this setup is that China is desperate to stop capital flight and the weakening of the Yuan. Trump’s China-bashing rhetoric isn’t helping any.
Mike “Mish” Shedlock
Not particular to the topic above…but prompted by the madness in the market with valuations and risk off. I am of the group who has been out of the market in cash for a few years. Corporate stock buybacks, the Fed’s “monkey business” with rates, Europe playing a shell game….but seems that none of this matters and everyone is jumping into the market with both feet. Feel like a fool really…at least in the short term…we will see in the long term.
Frustrated, to say the least, that madness persists for so many years…
Feeling like a fool is their desire. You are the much vaunted “sideline money”, as am I. The market will continue to rise and it WILL eventually suck most of it in. Once in, then….that foolish feeling will return. For the stock market to rise, the money must come from somewhere. Sure, lots of it has been printed, but the real wealth is still hanging out there. If they can get us to mortgage our homes and any other asset of value to buy more stocks, the market will continue to rise, but once there is no more money to be had, the only liquidable asset will be stocks. At that point, who will buy? Its a dead end game and everyone knows it, but there is lots of profit in it for those who have the timing right. I KNOW I don’t and I’m not even going to try. I don’t gamble in Vegas and I don’t buy stocks.
You have company if it makes you feel any better. Each time since 2012, especially since 2013, when I felt I have hit the nail on its head, I have suddenly found I have been hit on my head by the central bankers. Hussman said it perfectly… You look like a fool before or after the event. I am choosing to be a fool before the event though it has proved to be PAINFUL AND COSTLY at the same time. I am not able to convince myself that it will end well or that I will be able to get out at the right time. My stand has been that it is better to be foolish and solvent rather than bright and insolvent (Nasdaq 2000, if you will).
But then I am dazed by the capability of The Fed, The Magician. The Fed seems to keep marching on and on.
Please solve for X
A dollar held by China is worthless to China unless spent in the US. By comparison, my local grocery store won’t accept Chinese currency at checkout. I need to find a way to convert Chinese currency to dollars before I can buy groceries.
To the Chinese, their USD reserves are useless until converted to Chinese currency. Ultimately, their reserves must be spent in the US to realize value.
All currencies work in this way. Trade deficits become currency surpluses to the other side.
Chinese people getting value out of the country is one unintended consequence of a dollar surplus. The Chinese taking the cash and buying US income producing assets is a typical reaction. The Chinese taking the cash and getting out of Dodge is less typical.
If the Chinese dumped the Treasuries, investors and insurance companies would say ‘thank you Jesus. We needed that.’ However, the Chinese would have pesky dollars that still need to be sold off somehow. In truth, the only option they have is to, as a state, buy US assets. Or, as a dollar seller, take whatever is offered by avaricious Chinese citizens and say ‘thank you’.
China and the Chinese people are also buying gold.
PS: The Chinese won’t run the printing press to buy UST debt from holders for the purpose of holding it longer in state hands. That’s much like lighting a cigar with a $20 bill. It would only make sense if the Chinese were producing internally at a greater value than the value of any US asset they could buy with dollar holdings.
Or … then they could use printed money to concentrate dollars in state hands for the purpose of state purchases of US assets. In other words, the Chinese govt is shopping.
Lots of interesting possibilities when you prefer imports over domestic production simply because they’re cheaper and economic theory concentrates on immediate costs being the driver for analyzing benefits.
Tony Bennett said:
Not sure what you mean about “printed money”.
China still a mercantile economy (per world bank 22.4% of $10.8 trillion (2015) economy exports) and runs large surpluses. Surplus (2016) with US $288 billion thru October. China awash with $US. The deepest and most liquid pool on the planet is US treasury market. Buying outside the treasury market (we’re talking an enormous amount of money) risks owning that market (shoots up as you buy … collapses if you try to withdrawl). For all its warts the sheer size of the treasury market one its attributes. Liquidity.
I meant they could gin up the printing press to buy $$ or equivalent in private Chinese hands (assuming legal for Chinese to hold $). But then they would have $$ to get rid of. Concentrated in state hands makes them a formidable tool for Chinese interests.
Or the Chinese cal sell than for whatever they can get to Chinese citizens who want to send them to the US for personal reasons.
Tony Bennett said:
If they go printing press they risk a currency crisis. China still loosely pegged to $US … and like Mish points out … they are selling treasuries in attempt to defend yuan. The capital flight outflow (been going on for a while) tells you all you need to know. If the insiders are scrambling to Get Out …. Stay Away.
Depreciation in the cards (building ghost cities maybe not such a good idea) as the NPLs will likely be in the $trillions … and the government will have to print – massively – to buy up all the bad debt.
Tony, defending yuan a good use for treasuries converted to usd. Agree China not pristine in a macroeconomic point of view. I hope they figure it out.
While I have nothing but bottomless cynical disrespect for the Eurozone, I hope the Chinese keep their economic problems under control. There’s nothing I want to see less than over 1 billion angry screaming Chinese who are upset about a financial collapse and looking for a freedom they have never experienced throughout their thousands of years old recorded history.
I’m only explaining simple trade theory using actual examples in what should have been non-controversial. Most people it appears don’t understand simple trade theory and conflate other issues with the simple need to convert foreign currencies back into local ones. You can’t spend yuan at the grocery store any more than they spend dollars for their stuff, unless they have a means to work with dual currencies commonplace .
Is not creating massive debt internally and then rolling it over when it can’t be repaid just another means of “printing”? My understanding is that the Chinese have created massive bad debt that will never be repaid….and I’m not talking about sovereign debt.
“To the Chinese, their USD reserves are useless until converted to Chinese currency. Ultimately, their reserves must be spent in the US to realize value.”
If I’m not mistaken, ‘reserves’ mainly include Treasuries – not US currency. In other words, the cash was already spent on the Treasuries.
A treasury is a different form of dollar. Sell a UST and you get dollars. Then you need to get rid of them somehow. You don’t sell a UST into Chinese currency unless someone is doing it for you at the time of sale. Then they have dollars to get rid of.
In one phone call they can convert it into any currency they please. Global currency trade is over 5 trillion a day. If they want Euros, AUD, Rand, Kronas, etc… someone will VERY HAPPILY facilitate. Banks don’t make their money from customers like you and I. They don’t even know we exist.
The point is, a $ or UST is worth zip until converted into a currency they can use. The fact computers convert zillions per day is irrelevant. Simple trade theory.
Yes the could but it would be a huge mistake. So they won’t.And you miss a ky point. Someone has to hold every dollar and every treasury. So If China sold them all, who is going to buy them all. What will they do with them?
Yep, but the Chinese don’t need to spend them in US, they can buy into foreign currency, buy foreign assets, invest in foreign business etc.
So apart from the headline of cash/dollars leaving China, going to take more to convince me it is a rush into US assets – would want to see full accounts for a trillion, not of a few billion here and there. The Chinese like to handle the movement of capital from China at state level, always have, so restrictions increasing does not necessarily signal large private flows, might just be aimed at closing windows that were getting too much use, but small in increase in absolute terms. Just saying that not conclusive.
Agree. It can go slow and with a plan. Good management if done this way. Eventually, $ end up back home. Might take some time. Since repatriation involved, might be for US exports (yay) might be for asset sales (meh).
Gold star to you.
I think that was the point of my above comment. You drinking tonight?
Jon Sellers said:
“A dollar held by China is worthless to China unless spent in the US.”
Makes the assumption China wants to acquire American products or assets. That’s not the case. China wants to acquire American manufacturing know-how and jobs. Keeping the dollars in China allows that to happen.
You keeping yuan in your basement accomplishes the same thing if you want Chinese know-how? Yuan just sitting there? Next to the washing machine? Look, this is simple trade theory everyone appears to conflate with god knows what else. Dollars sitting in China are worth squat until spent. Eventually, they need to be repatriated to the US or spent on investment where the sellers accept USD. Like being worth $1billion the day after you die. Too bad you didn’t spend it a few days sooner. But, somebody will spend it after you’re gone and live a high life. It won’t continue to just sit there and be useless .
To spend $ in China you need to find a Chinese who accepts $ or convert it to yuan and spend the yuan. Someone who has yuan buys $ from you. Eventually $ needs to be repatriated to the US. It can go through several hands first. No law against it. Sorry for making the transaction too simple. Perhaps I should have jazzed it up with convolution and lots of buzzwords?
Tony Bennett said:
“I smell more capital controls, which run against any hopes of reform or internationalization of the yuan”
And why talk of the yuan being a (major) reserve currency is off base.
Perhaps they could buy Detroit. I hear that Chicago pension bonds are a good deal.
Couldn’t China sell US Bonds, and use USD to buy gold from just about any nation (or individual) willing to sell? I believe China’s gold stash is increasing and going to continue to increase until the big monetary reset comes. Than, whomever is a holder of gold will have a seat at the table when the rules of the game are rewritten.
Gold is a universal medium of exchange and store of value, but the value fluctuates according to the market. On any given day it can depreciate or appreciate in value and nobody can do anything but watch.
A factory with patents has long term appreciating value if managed well. It provides jobs and income.
Gold is better than nothing but still dead weight. You can’t eat it or live in it or create a job from it. The same as any non-income producing asset.
I don’t view it as gold fluctuating, as it remains the same. It’s fiat money that fluctuates.
It’s true that gold is a silly investment. What other investment requires intensive capital to remove from the ground and refine, only to be stuck in some safe or vault somewhere? Nevertheless, societies value it.
And would you not be able to eat a factory, nor be allowed to live in it. If something wasn’t used to store value, you would never accumulate enough to build a factory. Gold serves that purpose. It was never meant to be eaten.
A factory might be like a share of stock or it might be an income producing asset. It might just sit there like gold or it might provide jobs. Gold will ALWAYS just sit there and be worth no more than what anyone will pay for it at that moment.
Gold is worth $X today and will be worth something else next week, month,year. That’s fluctuating value whether or not you agree on the definition of fluctuation. A $ is always worth $, less inflation plus interest if applicable. Gold is like a share of stock.
There is no interest rate to speak of at the moment, but it is very easy to capture the bond market rate of interest on long physical gold holdings.
Very Risky – China must hold enough reserves to handle capital outflows back to the US. The safest thing to do is hold reserves in the currency of the county where it is running a current account surplus with – everything else if pro-cyclical and can cause huge problems. Imaging China buying copper or oil at the peak. Effectively, China is restricted to US treasuries
Yes they could by gold, or gold mines, or other real assets
gold is also useless until you spend it.
It’s not useless at all when purchased with currencies that are subsequently devalued, as has happened recently in several countries around the world.
I know that you have already admitted that it is a store of value, but that is awfully far from being “useless” under certain circumstances.
Good money is a medium of exchange, a store of value, and a stable measure. You mentioned making a good trade, thus recognizing the store of value. You can’t spend gold at the gas station, usually. The price of gold fluctuates daily. So do currency pairs but so do stocks and so do art objects. You can spend gold about as well as you can spend a Picasso painting.
Bitgold is very usable for transactions and it is real physical gold
Even Schiff now agrees
bitcoin is great medium of exchange and a fair unit of measure – x bitcoins to remove the ransom-ware from my pc for example – but store of value ??? Not exactly. Will it be worth par, 2x or 1/2x next year. Your guess is as good as anyone’s.
Bit gold is eve more nebulous.
how does one take physical possession of bitgold? It is it like a gold eft where every share is assured to be backed up by physical gold? Does valuation follow gold quotes, meaning it can be +/- $$$ month to month? What about recourse if a blockchain isn’t what you thought it was?
mishgea, list 100 cmmon ordinary spots where bitgold is usable to pay a bill. links ok. Feel free to get Schiff’s help on this. Amazon, Aldi, BP gas, eBay? A vending machine?
Really, for a bright guy, your argument is overwrought. Gold is vastly more liquid than a Picasso painting. And during a time of extreme crisis, is there a nonproductive asset that you would prefer to own more than gold?
Tinky, identify the last crisis when gold was preferred over $ in the US. Just one. Nuts who store a year of food in the basement and live in cammies in the backwoods with a house filled with guns specifically excluded.
tinky, agree gold is more liquid than art, but not by much. Both need to be converted to cash to be useful, although the Picasso can be looked at with joy. I suppose gold can be too, but that would be weird.
cdr – your question as to “where bitgold is usable to pay a bill” indicates that you are utterly clueless as to what bitgold is.
You can use it anywhere credit/debit cards are accepted!
Germ, you got me. Ha Ha. It’s a credit card or debit card – unsure exactly, where the merchant is paid in cash and only sees plastic. Still can’t use it where they say Visa/MC/ Amex /Discover only. But ha ha you got me. I thought it was something weird like bitcoin. Will they take bitgold for ransomware? I should have looked it up first. The weird name put me off.
Germ, still just guessing on some since I spent 5 seconds on the wikipedia page, I’m assuming the merchant is paid in cash like a CC. Do they get bitgold in payment instead? If not, what’s the point with the gold? Do they need to find a Bitgold Accepted Here sign to spend anything?
Or is it a plain vanilla debit card where you buy in with gold and run it down with cash? Sounds complicated if that’s it. How do you transfer the gold to the debit card issuer?
Much of that Chinese capital is flying into West Coast real estate and may be followed by the Chinese investors themselves.
When looking at China and U.S. one has to realize that the tandem through trade exports or imports each others policies. In essence the manipulation of internal policy of capital controls forces outward aspects onto trade partners.
China is inflating away its debts and debasing savings of the public. Limits on ability to withstand this assault on capital held by the public can only be prevented by exiting the system. Thus asset type inflation elsewhere where this capital funds flow and bid up to save themselves from ruin in their home country.
If we boost rates we essentially force liquidate the debt financed non liquid investments not only in U.S. but also China, since those bad debts at rates below the possible risk free rate will not be swapable,REPOble, or heldable in the financial system without realization of present value worthlessness. The sad truth is that if you were the marginal producer of the marginal good financed with marginal capital, you will be the margin that is eliminated. China still is attempting to foster conservancy of said system into creating equity via forced repossession of popular savings into public growth. Yet with every turn of capital through the trade balance it becomes impossible to hide.
One could argue that China’s ability to ever convert 3t of treasuries into real assets is limited due to politics. ( of the US ), so what is the point of owning them ? Gold and silver are probably the only assets that the world would allow China to completely acquire – since all western Govt seem to hate gold anyway. ThenChina would own $3t of gold instead of $3t of ( I would argue ) worthless ) treasury paper.
Sure this may push gold to some crazy valuation ( $50,000 /oz ) .
The value of such horde may turn out to be worthless as the west would refuse to accept gold as payment for trade.
However as Long as China keeps producing more than is consumes – a trade surplus – it won’t require the west to accept gold anyhow.
It will naturally keep building up a surplus of foreign assets – treasuries, cash and real assets.
These foreign assets are at massive risk when the geo politics turns real nasty and punitive taxes are levied on them – at the request of the domestic working class.
China needs to keeps it bounty from persistent Trade surpluses closer to home. More gold, more commodities, more intellectual property transfers, and ultimately a much more powerful military that can protect its homeland but also its foreign held assets. Just like the US has done Over the last 50 yrs.
“…all western Govt seem to hate gold anyway.”
Boy, you must be gulping down the propaganda. Western governments hate it when their citizens own gold, but they themselves? Not so much.
To use just one of many examples, here’s a link to the ECB’s most recent Consolidated Financial Statement. What sits atop the asset side of the ledger? GOLD:
didn’t look at the link but I would take gold over a euro any day. Someday they will be worth less than used Charmin. They’re voting their book.
BTW, today is the 75th anniversary of the attack on Pearl Harbor. Thinking about buying a Mitsubishi car today? Mitsubishi made Japan’s #1 fighter plane the A6M Zero, which was one of the planes that killed Americans that day (and many other days). Ironically, British designers and engineers were hired to get Mitsubishi’s airplane manufacturing started in the 1920s. During WW2 American pows were used for slave labor by Mitsubishi. Last year Mitsubishi became the first major Japanese corporation to apologize for using American pows for slave labor.
That’s your history lesson for today.
I’m not so sure some of the analysis here is quite correct. Reserves are not an ‘asset” in the strictest sense. They are a balancing entry in the local currency ledger i.e. for every $1 in possession of the PBoC, there are, say, 6(ish) Yuan in circulation in China (based on the prior long-term fix). The PBoC has printed this Yuan to exchange for $. So, for every $1 of reserves that is sold by the PBoC to a Chinese Corp or sent abroad today, local currency is drained by roughly 7 Yuan (current fix).
When the Yuan was appreciating strongly a few years back, the ‘peg’ meant that Yuan could be bought cheaply with $s. Now the pendulum has swung, the $ can be bought cheaply with Yuan i.e. via the fixed exchange rate, which is why the downward pressure and why the PBoC has to depreciate the Yuan. It’s like hearing that your local store is selling $20 bills for $15. Everyone would head down there. The idea that the Chinese suddenly want ‘value’ from their $s is not right. It’s just that, having acquired your $20 bill for $15 you need to put it to use in order to realise that discount so it goes abroad to buy assets (effectively at the discounted rate).
The PBoC is in a diabolical position because they need to adjust the ‘fix’ in the face of $ appreciation but they don’t want to exacerbate capital flight by doing it in large chunks as it then becomes a doom-loop. In addition, as they defend the peg the PBoC is draining domestic liquidity which threatens all the domestic bubbles, along with the solvency of domestic $ borrowers. The best the PBoC can hope for is that the U.S. undertakes direct action to weaken the $, otherwise the global economy ex-America could be in terrible strife.
All countries are “currency manipulators” but the most powerful is the U.S. Federal Reserve.
We are supporting our “friends” in the European Union and in Greater Britain, thus the DXY is falling because of our actions and not China’s.
While the China’s government is trying to prop-up the Yuan by selling Treasuries, private citizens in China are moving their money into Treasuries and parking the proceeds where it is difficult for their government to grab them.
Capital Flows reveal all.
Now can someone please explain why the Yuan was included in the make up of SDRs ?
ambrose bierce said:
China wants to hold the world’s reserve currency. This provides certain benefits. They also hold a sizable amount of US debt, and the US has the most powerful seat on the IMF. The SDR offers distinct advantages to leading economies, and not so much to the BRICs, which includes China. China is pushing for a greater economic role.
Ken Pollinger, Ph.D. said:
Frog. Please read JIm Rickards’ books, especially his NEW one; The Road to Ruin. But his The New Case for Gold should also do it. Ken
ambrose bierce said:
We offer China bonds in lieu of cash, for settlement. There is no path to repatriot those bonds, and China in turn may elect to sell bonds, their Fx reserves in the secondary market (Belgium) since they are ostensibly the middle man in the deal. Without the peg in an open economy the PBOC is only the holder of that money.
The US Fed has the authority to print money, really, and make payments in cash, presumably at the direction of the government. (Such as pallets of money to Iraq, and lately Iran. No reason to assume they aren’t swapping dollars for bonds but what will PBOC do with USD? They could issue it to their clients on demand, and watch massive capital flight, or install capital controls.
Consider to what extent the PBOC owns those Fx reserves, and is therefore a seller of bonds and a buyer outright of dollars. Assuming Bernanke’s notion of sterilization (the PBOC is the owner of those reserves) continues to work, the PBOC is a roach motel for hot money. China’s capital controls serve to strengthen the governments control of its currency, in opposition to the role predicated to it as the middle man. The true owners of those reserves begin to get nervous about the rising dollar, which depreciates their share of things, (America gets cheap labor, China buys overvalued assets) and they find ways to (clever financially engineered ways) to break the PBOCs hold. This I think explains why the US market is on a tear. Inflation is too much money chasing too few goods, but if you reduce the size of the currency float, its too little money chasing too few goods (strong dollar trade effect) and that is deflation since the bonds were massively levered up in the first place.
I am not sure I agree with the statement that: “one way or another, those dollars will return, buying US assets. It’s the price we pay for running a trade deficit with China.” The dollars are already in in the US – in the hands of whoever sold China the Treasuries. The suggestion that China’s reserve holdings represents dollars that have to return to US assets ignores the fact that their reserves are already in US assets (Treasuries). The only dollars that in theory must return to the US is currency held outside the country – which itself is significant but well under $1 Trillion (iirc). In this case China has a US asset that it can sell and either buy another US asset (zero net add to US asset demand) or sell the resulting dollars for another currency and buy some other country’s assets (net negative for US assets). I do get that China may swap its Treasuries for shares of US companies or real estate, etc… but some other dollar holder owns those assets now.
I apologize in in advance, if i misunderstood the quoted comment.
I discuss that a bit here
The statement is accurate
The dollars will eventually come home
ambrose bierce said:
One reader asked 100 places where Bitgold could be used. What a joke.
Bitgold can be used ANYWHERE that takes MasterCard.
Amazon, Aldi, BP gas, eBay? A vending machine?
Yes, Yes (if Aldi takes cards), Yes, and Yes (if the vending machine take cards)
Does that address your snide ignorance?
Another reader asked about delivery.
Very easy in BitCubes.
Amazing how little people known about things I have written about.
Bitgold allows one to make purchases in any size, with real physical gold. The only requirement is the merchant has to take a credit card (debit card actually but it looks like a credit card)
Another reader mentions blockchain. Bitgold has NOTHING to do with blockchain. It does not use the technology at all.