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One month ago, we first revealed that for one prominent winner from the subprime crisis, Hayman Capital’s Kyle Bass, “the greatest investment opportunity right now” is to short the Chinese Yuan: as he explained “given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency.” He even went so far as to give a timeframe: “we think it’s going to be in the next 12-18 months.”
Then, during the Davos boondoggle, none other than the man who broke the Bank of England, George Soros, noted that he too is shorting the Yuan, which in turn prompted China’s communist party mouthpiece, the People’s Daily to officially warn Soros to back off adding in a petulant, schoolyard bully-ish voice “You Cannot Possibly Succeed, Ha, Ha.” Yes, China really said that.
– It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington (ZeroHedge, Aug 27, 2015):
As Bloomberg reports, “China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter. Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales.”
– Yuan Strengthens Most Since March, China Unveils New Bailout Source After Rescue Fund Runs Out Of Fire-Power (ZeroHedge, Aug 27, 2015):
Update: China readies new bailout mechanism – pooling CNY2 Trillion of Pension funds for “investment”
A busy night in AsiaPac before China even opens. Vietnam had a failed bond auction, Japanese data was mixed (retail sales good, household spending bad, CPI just right), Moody’s downgrades China growth (surprise!), China re-blames US for global market rout, and then the big one hits – China’s bailout fund needs more money (applies for more loans from banks) – in other words – The PBOC just got a margin call. China margin debt balance fell for 8th straight day (although the short-selling balance picked up to 1-week highs). China unveiled some economic reforms – lifting tax exemption and foreign real estate investment rules. PBOC fixesds the Yuan 0.15% stronger – most since March, but even with last night’s epic intervention, SHCOMP looks set for its worst week since Lehman.
– China chooses her weapons (Gold Money Aug 20, 2015):
China’s recent mini-devaluations had less to do with her mounting economic challenges, and more to do with a statement from the IMF on 4 August, that it was proposing to defer the decision to include the yuan in the SDR until next October
The IMF’s excuse was to avoid changes at the calendar year-end and to allow users of the SDR time to “adjust to a potential changed basket composition”. It was a poor explanation that was hardly credible, given that SDR users have already had five years to prepare; but the decision confirming the delay was finally released by the IMF in a statement on Wednesday 19th.
– No SDR For You: IMF Tells China To Wait At Least One Year Until Reserve Basket Inclusion (ZeroHedge, Aug 19, 2015):
If there was any confusion as to whether the recently devalued Chinese yuan would be landing in the IMF SDR basket on January 1, the Fund just cleared it up.
– Chinese Devaluation Extends To 3rd Day – Yuan Hits 4 Year Low, Japan Escalates Currency Race-To-The-Bottom Rhetoric (ZeroHedge, Aug 12, 2015):
The “one-off” adjustment has now reached its 3rd day as The PBOC has now devalued the Yuan fix by 4.65% back to July 2011 lows.
The PBOC seeks to reassure…
– Dollar Tumbles As Fed Rate Hike Suddenly Looking Very Uncertain To Goldman, Bank Of America (ZeroHedge, Aug 12, 2015):
After China’s shocking currency devaluation, which some more conspiratorially-minded observers have concluded was China’s retaliation to the west for the IMF’s recent snub that pushed back China’s evaluation for inclusion into the SDR to some indefinite point in 2016, the only question on everyone’s mind is whether the Fed will delay or outright cancel any imminent “data-dependent” rate hikes as a result of the implicit tightening of monetary conditions thanks to China, and the dramatic appreciation of the USD which would not have taken place without China.
– This Is Not A Drill: India, Russia And Thailand Prepare For Currency War (ZeroHedge, Aug 11, 2015):
When China sneezes, the world catches a cold. Alternatively, when China devalues, the rest of the (exporting) world scrambles to not be the last (exporting) nation standing, and to do so next, before everyone else does.
Case in point, at least three major emerging market nations announced they are bracing for currency war.
First India, where NDTV ask rhetorically “How China’s Devaluation of Renminbi Impacts India” and answers:
– China Enters Currency War – Devalues Yuan By Most On Record (ZeroHedge, Aug 11, 2015):
Update: The Chinese currency complex is collapsing… 12 month NDFs just hit a new 5 year lows against the USD – biggest plunge since Lehman
– China “Loses Battle Over Yuan”, And Now The Global Currency War Begins (ZeroHedge, Aug 11, 2015):
Almost exactly seven months ago, on January 15, the Swiss National Bank shocked the world when it admitted defeat in a long-standing war to keep the Swiss Franc artificially weak, and after a desperate 3 year-long gamble, which included loading up the SNB’s balance sheet with enough EUR-denominated garbage to almost equal the Swiss GDP, it finally gave up and on one cold, shocking January morning the EURCHF imploded, crushing countless carry-trade surfers.
Fast forward to the morning of August 11 when in a virtually identical stunner, the PBOC itself admitted defeat in the currency battle, only unlike the SNB, the Chinese central bank had struggled to keep the Yuan propped up, at the cost of nearly $1 billion in daily foreign reserve outflows, which as this website noted first months ago, also included the dumping of a record amount of US government treasurys.
And with global trade crashing, Chinese exports tumbling, and China having nothing to show for its USD peg besides a propped and manipulated stock “market” which has become the laughing stock around the globe, at the cost of even more reserve outflows, it no longer made any sense for China to avoid the currency wars and so, first thing this morning China admitted that, as Market News summarized, the “PBOC lost Battle Over Yuan.”
That’s only part of the story though, because as MNI also adds, the real, global currency war is only just starting.
– Chinese Trade Crashes, And Why A Yuan Devaluation Is Now Just A Matter Of Time (ZeroHedge, Aug 8, 2015):
Overnight we got another acute reminder of just who is lying hunched over, comatose in the driver’s seat of global commerce: the country whose July exports just crashed by 8.3% Y/Y (and down 3.6% from the month before) far greater than the consensus estimate of only a 1.5% drop, and the biggest drop in four months following the modest June rebound by 2.8%: China.
– BRICS Bank, AIIB Pledge Partnership, Loans To Be Issued In Yuan (ZeroHedge, July 25, 2015):
Over the first half of the year, we’ve built on several narratives that we believe are critical when it comes to understanding how the intersection of geopolitics and economics is set to shape the world going forward.
One of these narratives revolves around the extent to which three China-led ventures are set to supplant traditionally dominant supranational lenders on the way to embedding the yuan in international trade and investment.
And so it begins …
– China’s Record Dumping Of US Treasuries Leaves Goldman Speechless (ZeroHedge, July 22, 2015):
On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.
We then put China’s change in FX reserves alongside the total Treasury holdings of China and its “anonymous” offshore Treasury dealer Euroclear (aka “Belgium”) as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted – namely virtually the entire delta in Chinese FX reserves come via China’s US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.
We explained all of his on Friday in “China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium“, and frankly we have been surprised that this extremely important topic has not gotten broader attention.
Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China’s dramatic reserve liquidation
Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.
JPM conclusion is actually quite stunning:
– The PetroYuan Is Born: Gazprom Now Settling All Crude Sales To China In Renminbi (ZeroHedge, June 9, 2015):
As Russia adjusts to Western sanctions stemming from the conflict in Ukraine, Gazprom is now settling all crude sales to China in renminbi. At the intersection of the petrodollar’s death and yuan hegemony is: the PetroYuan…
– De-Dollarization Du Jour: Russia’s Largest Bank Issues Yuan-Denominated Guarantees (ZeroHedge, June 7, 2015):
The unipolar, dollar-dominated post-war world is shifting under Washington’s feet.
Leading the push towards multipolarity and de-dollarization are a resurgent Russia and China, the rising superpower. The demise of the Bretton Woods world order is perhaps nowhere more apparent than in the launch of the BRICS bank and the establishment of the AIIB. These new structures represent a move away from US-dominated multilateral institutions and their very existence suggests that a failure to adapt to economic realities and an inability or unwillingness to meet the needs of the modern world may soon drive institutions like the IMF into irrelevancy.
– China requests IMF recommend renminbi as a reserve currency (Government Slaves, May 14, 2015)
– Moscow Launches Ruble-Renminbi Futures To “Facilitate Trade Between China And Russia” (ZeroHedge, March 17, 2015):
While the west huffs and puffs, and threatens to unleash even more “costs” on Russia in the form of additional sanctions which will assure that Europe’s latest deflationary recession is even more acute, an “isolated” Russia is looking to outside, and to the east, and as part of its most recent de-dollarization initiative, the Moscow Exchange announced it has started trading Chinese Renminbi-Russian Ruble currency futures.
From the press release:
From 17 March the Moscow Exchange has started trading in a futures contract on the currency pair Chinese Renminbi — Russian rouble
– The De-Dollarization Axis: China Completes SWIFT Alternative, May Launch As Soon As September (ZeroHedge, March 9, 2015):
One of the recurring threats used by the western nations in their cold (and increasingly more hot) war with Russia, is that Putin’s regime may be locked out of all international monetary transactions when Moscow is disconnected from the EU-based global currency messaging and interchange service known as SWIFT (a move, incidentally, which SWIFT lamented as was revealed in October when we reported that it announces it “regrets the pressure” to disconnect Russia).
– The Chinese have put out billboard ads announcing the renminbi as the new world currency (Sovereign Man, March 4, 2015):
When I arrived to Bangkok the other day, coming down the motorway from the airport I saw a huge billboard – and it floored me.
The billboard was from the Bank of China. It said: “RMB: New Choice; The World Currency”
Given that the Bank of China is more than 70% owned by the government of the People’s Republic of China, I find this very significant.
– UK Hints At Next Reserve Currency, To Issue Chinese Yuan-Denominated Bond (ZeroHedge, Sep 15, 2014):
Yuanification continues around the world. As The USA attempts to corral its allies in a ‘broad coalition’, an increasing number of people – including domestic economic policy advisors – are shifting away from the USD as primary reserve currency. However, the move by British Chancellor of the Exchequer George Osborne, announced Friday, is likely the most notable yet in the world’s de-dollarization. As Xinhua reports, the British government intend to be the first nation (ex-China) to issue Renminbi denominated bond and to use the proceeds to finance the government’s reserves of foreign currency. Osborne described this dialogue outcome as “a historic moment” and a statement of British confidence in the potential of the RMB to become “the main global reserves currency”.
In my opinion gold in (extended or permanent) backwardation is signalling a total loss of confidence in the $US Dollar and is a clear sign that the dollar endgame is here.
The Great Depression will soon look like a walk in the park.
– When You See This Happen, You Know It’s Game Over For The Dollar (ZeroHedge, July 16, 2014):
Exactly 70 years ago to the day, hundreds of delegates from 44 nations were busy at work in Bretton Woods, New Hampshire creating a brand new financial system.
World War II had just ended. Europe was in ruin.
And since the US was simultaneously the largest economy in the world, the primary victor in the war, and the only major power with its productive capacity intact, it was easy to dictate terms: the dollar would dominate the new system.
Every nation would hold dollars as the primary reserve currency, and the dollar would be redeemable for gold at $35/ounce.
– By “Punishing” France, The US Just Accelerated The Demise Of The Dollar (ZeroHedge, July 4, 2014):
Not even we anticipated this particular “unintended consequence” as a result of the US multi-billion dollar fine on BNP (which France took very much to heart). Moments ago, in a lengthy interview given to French magazine Investir, none other than the governor of the French National Bank Christian Noyer and member of the ECB’s governing board, said this stunner at the very end, via Bloomberg:
- NOYER: BNP CASE WILL ENCOURAGE ‘DIVERSIFICATION’ FROM DOLLAR
Here is the full google translated segment:
Q. Doesn’t the role of the dollar as an international currency create systemic risk?
Noyer: Beyond [the BNP] case, increased legal risks from the application of U.S. rules to all dollar transactions around the world will encourage a diversification from the dollar. BNP Paribas was the occasion for many observers to remember that there has been a number of sanctions and that there would certainly be others in the future. A movement to diversify the currencies used in international trade is inevitable. Trade between Europe and China does not need to use the dollar and may be read and fully paid in euros or renminbi. Walking towards a multipolar world is the natural monetary policy, since there are several major economic and monetary powerful ensembles. China has decided to develop the renminbi as a settlement currency. The Bank of France was behind the popular ECB-PBOC swap and we have just concluded a memorandum on the creation of a system of offshore renminbi clearing in Paris. We have very strong cooperation with the PBOC in this field. But these changes take time. We must not forget that it took decades after the United States became the world’s largest economy for the dollar to replace the British pound as the first international currency. But the phenomenon of U.S. rules expanding to all USD-denominated transactions around the world can have an accelerating effect.
In other words, the head of the French central bank, and ECB member, Christian Noyer, just issued a direct threat to the world’s reserve currency (for now), the US Dollar.
– Wow. Mainstream press: “The US’s dollar domination is coming to an end” (Sovereign Man, June 18, 2014):
“Whoever is winning at the moment will always seem to be invincible.”
– George Orwell
Wise words indeed as they aptly describe misguided confidence in the US dollar.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT), which helps manage the global banking system, tells us that US dollar settlement accounts for the vast majority of global trade.
And as Orwell suggests, many people take it for granted that just because the dollar is in the lead today, it will be that way forever.
They couldn’t be more wrong. There’s been a dominant reserve currency for thousands of years.
– Gazprom Ready To Drop Dollar, Settle China Contracts In Yuan Or Rubles (ZeroHedge, June 26, 2014):
A little over a month ago, when Russia announced the much anticipated “Holy Grail” energy deal with China, some were disappointed that despite this symbolic agreement meant to break the petrodollar’s stranglehold on the rest of the world, neither Russia nor China announced payment terms to be in anything but dollars. In doing so they admitted that while both nations are eager to move away from a US Dollar reserve currency, neither is yet able to provide an alternative. This changed rather dramatically overnight when in a little noticed statement, Gazprom’s CFO Andrey Kruglov uttered the magic words (via Bloomberg):
- GAZPROM READY TO SETTLE CHINA CONTRACTS IN YUAN OR RUBLES: CFO
In other words just as the US may or may not be preparing to export crude – a step which would weaken the dollar’s reserve status as traditional US oil trading partners will need to find other import customers who pay in non-USD currencies – the world’s two other superpowers are preparing to respond. And once the bilateral trade in Rubles or Renminbi is established, the rest of the energy world will piggyback.