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! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • French labour union workers and students attend a demonstration against the French labour law proposal in Marseille, France, as part of a nationwide labor reform protests and strikes, March 31, 2016. REUTERS/Jean-Paul Pelissier/File PhotoHow the Welfare State Dies
      Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico).  Gee, we wonder why?   They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
  • The-answer-is-yesToward Freedom: Will The UK Write History?
      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • water houseA Market Ready to Blow and the Flag of the Conquerors
      Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast.   St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6   Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • MACAU, CHINA - JANUARY 28: Buildings of Macau Casino on January 28, 2013, Gambling tourism is Macau's biggest source of revenue, making up about fifty percent of the economy.What Could Possibly Go Wrong?
      A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.   Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool   I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the...
  • saupload_loves-me-loves-me-notA Darwin Award for Capital Allocation
      Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.   The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne   Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and...
  • rate_hike_cartoon_10.15.2015_largeJanet Yellen’s $200-Trillion Debt Problem
      Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.   “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
  • deflated-souffleThe Fed’s  Doomsday Device
      Bezzle BALTIMORE –  Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh?   Only two? There were four last time!   Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...
  • Brexit supporterGold and Brexit
      Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use.   August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge.   Moreover, insuring against Brexit might ironically be equivalent...
  • cameron at the EUBrexit Paranoia Creeps Into the Markets
      European Stocks Look Really Bad... Late last week stock markets around the world weakened and it seemed as though recent “Brexit” polls showing that the “leave” campaign has obtained a slight lead provided the trigger. The idea was supported by a notable surge in the British pound's volatility.   Battening down the hatches...   On the other hand, if one looks at European stocks, one could just as well argue that their bearish trend is simply continuing – and...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com