An Unexpected Improvement…

The Wall Street Journal has just run an article about the latest data manipulation coming out of China. China is experiencing strong currency outflows. This is a combination of “hot money” from outside China, which came into the country to bet on an appreciating currency (the yuan) and is now retreating, and domestic money that is looking for a foreign home now that the Chinese bubble is appearing less and less sustainable.

 

china-foreign-exchange-reserves@2xChina’s foreign exchange reserves –  a reversal of fortunes – click to enlarge.

 

In a reversal of the process that I described here, this is causing China to spend huge amounts of its foreign exchange holdings to prop up the yuan.  This is the exact opposite of what China had been doing, which was to accumulate foreign exchange reserves as it depressed the yuan.  China is holding up the value of the yuan now because, although it ultimately wants to see the currency fall, it is worried that a sharp decrease will cause a self-fulfilling and destabilizing flight.

Investors have therefore been watching the monthly reports of China’s foreign exchange holdings with interest to gauge the amount of capital flight and the ability of the Chinese government to support the currency.  The numbers have not been comforting: foreign exchange holdings dropped from a peak of almost $4 trillion in March 2014 to $3.2 trillion in February 2016.

During most of 2015, the fall was running at about $80 to $100 billion per month, even though China was running a large balance of payments surplus, which would normally increase the amount of reserves.  Traders were beginning to speculate on how much longer China could continue to bleed.

And then it stopped: in February 2016, the monthly drop equaled $29 billion, down from $99 billion in January.  Investors breathed a sigh of relief.  It looked like the yuan wasn’t going to detonate, which was one of the possible “black swans” behind the fall in global markets at the end of 2015 and the beginning of 2016.

 

Lies, Damned Lies and Statistics

But, of course, they lied.  Instead of buying the yuan in the “spot” markets, paying for the purchases with foreign exchange reserves in a way which is highly visible, the Chinese government has been using its lapdog banks to purchase the currency in the “forward” markets. These forward purchases hold up the current value of the yuan since the forward and spot markets are mathematically linked through interest rates.

The benefit for the Chinese is that forward purchases, which may not settle for months or even years, do not show up as an outflow of foreign exchange reserves for a long time.  This allows the Chinese government to pretend that the pressures on its currency are waning and that it is winning the battle against those nasty speculators.

 

Yuan, long termUSD-CNY, long term – click to enlarge.

 

Since, as I have noted before, the drawdown of foreign exchange reserves also tightens the domestic money supply, it also helps China to continue to run the very loose monetary policy that the government thinks is necessary to hold off recessionary pressures.

The WSJ article speculates that China may have $150 to $300 billion in currency forwards, most of which have been built up over the last few months.  The article also points out that the IMF, which has just promoted the yuan to the currency major leagues by including it in its Special Drawing Rights, is pressing China to disclose information on its forward positions.

The Chinese authorities promised to provide more information on its currency maneuvers when it joined the SDR in December of last year.  But apparently they have already forgotten. If it is true that China has rapidly built up this large forward position, it would mean that pressure on the yuan is continuing at a high level.  It would also mean that China is maintaining its world-leading position in falsifying economic statistics.

 

Charts by: TradingEconomics, BigCharts

 

Chart and image captions by PT

 

This article was originally posted at Economic Man.

 

Roger Barris is an American who has lived in Europe for over 20 years, now based in the UK. Although basically retired now, he previously had senior positions at Goldman Sachs, Deutsche Bank, Merrill Lynch and his own firm, initially in structured finance and latterly in principal and fiduciary investing, focussing on real estate. He has a BA in Economics from Bowdoin College (summa cum laude) and an MBA in Finance from the University of Michigan (highest honors).

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Punch-Drunk Investors & Extinct Bears, Part 1
      The Mother of All Blow-Offs We didn't really plan on writing about investor sentiment again so soon, but last week a few articles in the financial press caught our eye and after reviewing the data, we thought it would be a good idea to post a brief update. When positioning and sentiment reach levels that were never seen before after the market has gone through a blow-off move for more than a year, it may well be that it means something for once.   Sloshed as we are...   a...
  • Why You Should Embrace the Twilight of the Debt Bubble Age
      Onward Toward Default People are hard to please these days.  Clients, customers, and cohorts – the whole lot.  They’re quick to point out your faults and flaws, even if they’re guilty of the same derelictions.   The age-old art of assigning blame – in this case complemented by firm knowledge of the proper way to prosperity (see lower right corner). Jack Lew not only sees the future with perfect clarity these days, he also seems to have spent his time as treasury...
  • Quantum Change in Gold Demand Continues - Precious Metals Supply-Demand Report
      Fundamental Developments In this New Year’s holiday shortened week, the price of gold moved up again, another $16 and silver another 29 cents. Or we should rather say the dollar moved down 0.03mg gold and 0.03 grams silver. It will make those who borrow to short the dollar happy...   Let’s take a look at the only true picture of the supply and demand fundamentals for the metals. But first, here are the charts of the prices of gold and silver, and the gold-silver...
  • As the Controlled Inflation Scheme Rolls On
      Controlled Inflation American consumers are not only feeling good.  They are feeling great. They are borrowing money – and spending it – like tomorrow will never come.   After an extended period of indulging in excessive moderation (left), the US consumer makes his innermost wishes known (right). [PT]   On Monday the Federal Reserve released its latest report of consumer credit outstanding.  According to the Fed’s bean counters, U.S. consumers racked...
  • Punch-Drunk Investors & Extinct Bears, Part 2
      Rydex Ratios Go Bonkers, Bears Are Dying Off For many years we have heard that the poor polar bears were in danger of dying out due to global warming. A fake photograph of one of the magnificent creatures drifting aimlessly in the ocean on a break-away ice floe was reproduced thousands of times all over the internet. In the meantime it has turned out that polar bears are doing so well, they are considered a quite dangerous plague in some regions in Alaska. Alas, there is one species of...
  • 2018: The Weakest Year in the Presidential Election Cycle Has Begun
      The Vote Buying Mirror Our readers are probably aware of the influence the US election cycle has on the stock market. After Donald Trump was elected president, a particularly strong rally in stock prices ensued.  Contrary to what many market participants seem to believe, trends in the stock market depend only to a negligible extent on whether a Republican or a Democrat wins the presidency. The market was e.g. just as strong under Democratic president Bill Clinton as it was under...
  • Cryptonite
      The Wingsuit Test of 1912 Late last year press reports informed us that by October, the number of active accounts at US cryptocurrency exchange Coinbase* had exceeded the number of accounts at Charles Schwab, one of the oldest US discount brokers, by 1.1 million. The report was dated November 27, by which time the number of accounts had just soared by another 1.6 million. We felt reminded of the final few weeks of China's stock market bubble, which saw similarly stunning growth in retail...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com