China’s Record Month

The beginning of a massive reserve unwind

By Christine HughesCanada. Chief Investment Strategist, OtterWood Capital:

China’s actions to stabilizing its currency have hit their reserves to the tune of $93.9 billion in August alone! The pressure from the August 11th devaluation has resulted in the first official reserve reduction in China since it joined the World Trade Organization in 2001.

Reserve accumulation

As the chart below shows China’s reserves have fallen over $500 billion in the past year (with August being a record month). So far it’s been a dramatic reduction and it’s only early September. I believe this is the beginning of a massive reserve unwind and it will continue to be a dramatic year.

Total reserves

By Christine Hughes, OtterWood Capital

Years of a global dollar-denominated borrowing binge has raised the risks of an Emerging-Market debt crisis, an epic USD short squeeze, and many big losers. Read… Fear the Strength of the US Dollar

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  7 comments for “China’s Record Month

  1. robert h siddell jr
    Sep 9, 2015 at 10:32 am

    Where are they spending all that money?

    • MattNiem
      Sep 9, 2015 at 6:11 pm

      To support the yuan exchange rate. I wonder what the pace is now after the devaluation. Is there need for more?

    • VegasBob
      Sep 9, 2015 at 6:30 pm

      It takes a lot of cash to command the stock market to rise…

  2. Sep 9, 2015 at 11:08 am

    $500 billion that is not going to go to the petroleum drillers = oil price crash.

    $500 billion that goes to the banks and other lenders for repayment of debt — that $500 billion is vanished, gone … liquidated … forever. (Money is created by lending it into existence, destroyed when debts are repaid.) The outcome is a money shortage that is self-amplifying as ever dollar repaid is a dollar unavailable for re-lending to someone else.

    RMB depreciation = dollar appreciation and self-amplifying desire to hoard it. Let the deflation begin!

    • CrazyCooter
      Sep 9, 2015 at 7:38 pm

      Wouldn’t that money go to holders of yuan, to push prices up via demand for yuan? The market expected more devaluation, so they were trying to hold a floor.

      Can you explain how that exterminates debt?

      Regards,

      Cooter

      • PlayMoney
        Sep 9, 2015 at 10:40 pm

        They have been selling treasuries for dollars, then converting dollars to yuan. Then using the yuan to prop up markets through their various little schemes. It only exterminates debt if you actually pay off debt, which they haven’t been doing as far as I know. Maybe they have some but wouldn’t meet their propping up markets goal.

  3. Heinrich Leopold
    Sep 13, 2015 at 9:20 am

    However China – a hoarder of dollars itself – has freed up 500 bn USD. So this is very bearish for the dollar as there are many more dollars in free circulation. In addition, there is pressure on oil, which is bearish for the shale drillers going bust in droves. This is additionally dollar negative. Fear a dollar crash.

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