SNEAKS: CHINA DUMPS $106 BILLION IN US TREASURIES SINCE DEVALUING THEIR CURRENCY! DOUBLED THE ENTIRE 2015 AMOUNT!
Submitted by IWB
Analysts are absolutely speechless to find out that China has sold as much in Treasurys in the past 2 weeks, over $100 billion, as it has sold in the entire first half of the year!
China dumped those US Treasuries to defend their devaluation of their currency; it was a direct assault on the US Dollar. If China has to continue defending their devalued currency, and the current pace of liquidity outflows continues, requiring the dumping of $100 billion in FX reserves (read US Treasurys) every two weeks, this means China has, oh, call it some 18 weeks of intervention ability left.
What will become of the United States if China does exactly that? What happens if they dump our treasuries every two weeks for 18 weeks to defend their own currency? Our economy will be utterly crushed by ultra-hyper-inflation . . .
On August 11, China devalued its currency, and in the subsequent 3 days the onshore Yuan, the CNY, tumbled by some 4% against the dollar. Then, as if by magic, the CNY stabilized when China started intervening massively, only this time not through the fixing, but in the actual FX market.
This means that while China has previously been dumping reserves as a matter of FX policy, after August 11 it was intervening directly in the FX market, with the intervention said to really pick up after the FOMC Minutes on August 19, the same day the market finally topped out, and has tumbled into a correction since then. The result was the same: massive FX reserve liquidations to defend the currency one way or the other.
And yet something curious emerges when comparing the traditionally tight, and inverse, relationship between the S&P and the Treausry long-end: the drop in yields has not been anywhere near as profound as the tumble in stocks. In fact, the 30 Year is wider now than where it was the day China announced the Yuan devaluation.
Why is that?
We hinted at the answer on two occasions earlier (here and here) and yet the point is so critical, and was missed by virtually all readers, that it deserves to be repeated once again: as part of China’s devaluation and subsequent attempts to contain said devaluation, it has been purging foreign reserves at an epic pace. Said otherwise, China has sold an epic amount of Treasurys in the past two weeks.
How epic? We turn it over to SocGen once again:
The PBoC cut the RRR for all banks by 50bp and offered additional reductions for leasing companies (300bp) and rural banks (50bp). All these will take effect as of 6 September, and the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate. In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.
There you have it: in the past two weeks alone China has sold a gargantuan $106 (or more) billion in US paper just as a result of the change in the currency regime!
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This week marks the annual MAKS air show that is held each year in Moscow and surrounding regions, and there is a very interesting lineup of attendees that are coming to this year’s event. Among them are several leaders from the Middle East and from OPEC nations, and it will bring together several parties that have the power to direct energy and military policies going forward for their countries.
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http://investmentwatchblog.com/sneaks-china-dumps-106-billion-in-us-treasuries-since-devaluing-their-currency-doubled-the-entire-2015-amount/