China’s Forex Reserves Plunge to More Than Three-Year Low
The world’s largest stockpile of foreign currency fell by $99.5 billion last month
By
Lingling Wei
Updated Feb. 7, 2016 3:54 a.m. ET
wsj.com
China’s foreign-exchange reserves fell to the lowest level in more than three years in January, raising questions about how long Beijing can keep burning through the rainy-day funds to defend the yuan without triggering massive capital flight.
The People’s Bank of China said Sunday that the world’s largest stockpile of foreign currency plunged by $99.5 billion last month, to $3.23 trillion. The drop follows a record $107.9 billion plunge in December and continues a decline that picked up speed in August, as China’s exchange-rate policies started to appear in flux.
In mid-August, the central bank suddenly devalued the yuan, saying it wanted to bring its value more in line with market forces. But the action backfired, as investors panic-sold the currency, forcing the Chinese central bank to dig into the reserves to stabilize it.
Last month, the central bank again had to dig deep into the reserves in the wake of a botched effort to guide the yuan weaker, a move that sparked fears of a deeper-than-expected slowdown in China’s economy, setting off a sharp selloff across global markets for stocks and commodities.
Many investors and analysts are questioning the central bank’s ability to continue such interventions. Already, the central bank is finding itself in a vicious cycle: As it repeatedly draws on the reserves to prop up the yuan, doubts grow about its ability to keep the currency stable, which then causes more money to leave the country, eroding the reserves further.
“It likely will be a long battle,” said an official at China’s central bank. The official cited the difficulties of stabilizing the currency and managing investors’ expectations as the economy slows. “But China still has sufficient reserves to withstand any external shocks,” the official said.
 EARGE
The notion that China has lost a measure of control over its currency is new to a country long criticized for its iron grip to ensure the yuan didn’t appreciate in a way detrimental to its exporters. Similarly, the recent plunge in China’s reserves is a contrast to years of buildup in the pile of cash as China’s economy and export sector boomed.
One question now is how much foreign currency China actually needs to have in reserve.
When the reserves peaked in mid-2014 at nearly $4 trillion, Chinese officials were concerned that the stockpile had become too big to manage efficiently. Much of China’s reserves are parked in low-yielding U.S. government bonds.
The current $3.23 trillion still gives Beijing a large war chest to meet its obligations to foreign creditors. About half of China’s external debt outstanding, which currently stands at $1.53 trillion, is yuan-denominated debt raised overseas, data from the central bank show.
But the reserves appear to be less than abundant if gauged by another measure -- the ratio of the currency reserves to M2, the broad money supply, which includes assets such as savings deposits and money-market funds as well as cash. The International Monetary Fund, the World Bank and others use the ratio to gauge the sufficiency of countries’ exchange reserves. The higher the ratio, the lower the likelihood of massive flight into other currencies.
Based on that measure, China should maintain between $2.13 trillion and $4.26 trillion worth of currency reserves to fend off any destructive capital outflow, estimates Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
“Whether China can keep adequate foreign-exchange reserves will depend on what the central bank is up to,” Mr. Zhang said. If the central bank intends to continue to intervene heavily to keep the yuan stable, he said, “the current level of reserves may not be adequate enough
On the other hand, Mr. Zhang said, if the central bank presses ahead on giving the market bigger sway in the exchange rate by reducing intervention and at the same time tightens capital controls, “the reserves will undoubtedly be enough.”
The People’s Bank of China has been doing both, prioritizing the yuan’s stability over market reforms. In recent weeks, while intervening to prop up the currency, the bank has imposed fresh controls aimed at preventing money from leaving the country. That strategy has confused investors both inside and outside China, resulting in both businesses and individuals rushing for the exit.
Western officials including U.S. Treasury Secretary Jacob Lew and the International Monetary Fund’s Christine Lagarde recently have urged Beijing to better communicate its policy intentions with the market.
Senior Chinese officials in recent weeks said they recognize the need for clearer communication to avoid roiling global markets. That said, they ruled out for now the possibility of a one-off sharp devaluation of the yuan as urged by some economists and investors, saying that would undermine Chinese purchasing power just as the government is trying to shift to an economy driven by consumption.
“A sharp weakening of the yuan is not in China’s interest,” said an official close to the leadership. Executives at China’s top four state-owned banks, which are among the market makers in China’s currency trading, say the central bank appears to be holding the line at 6.6 yuan per dollar in the near term.
The plunge in China’s currency reserves also reflects a smaller flow of foreign investment into China and greater demand for foreign currencies by Chinese companies and individuals.
Du Hanbin, an exporter in the southern Chinese boomtown of Shenzhen, said that since late last year, his company, a toy and furniture maker that mainly sells to the North American market, has been hoarding its dollar revenues rather than converting them immediately into yuan, also known as the renminbi. “The dollar is strong and the renminbi is depreciating,” Mr. Du said. “I want to minimize my losses by holding on to the dollar.”
The scale of China’s capital outflows is larger than the net decline in its reserves as the latter reflects foreign currency coming into the country as part of foreign investment. An analysis by GavekalDragonomics, a research firm specializing in China’s economy, estimates that the country’s outflows topped $700 billion last year, while central-bank data show currency reserves dropped a total of $512 billion in 2015.
According to Gavekal Dragonomics, a third of China’s $700 billion in outflows came from repayment of foreign debt by Chinese companies, 30% from China’s direct investment abroad, 10% from an increase in foreign-currency deposits by exporters like Mr. Du, and another 30% from sources that couldn’t be tracked, perhaps via illegal channels.
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Black Swans in Our Midst
From instability in Beijing spooking markets to the risk of a Japanese debt crash, investors should prepare for unexpected shocks in 2016.
By William Pesek
January 5, 2016
Seeing the back of 2015 suited many just fine. The collective angst in markets seemed to reach a fever pitch amid the year’s economic stumbles, geopolitical crackups and terrorist tirades. But what if 2016 is even worse?
There’s plenty of reason to bet this year will be calm by comparison. A little boredom would be very welcome. Then again, the list of “Black Swans” that could wreck the best-laid plans seems ominously lengthy. A quick summation of predictions for the types of unexpected shocks Nassim Nicholas Taleb popularized in his 2007 book: a Chinese hard landing; the Federal Reserve botching its rate-hike cycle; London leaving the European Union; oil prices surging (or crashing further); a collapsing dollar; cyber-attacks that panic governments and investors alike; a coup in Venezuela; and Americans electing Donald Trump.
At the risk of tossing fuel on an already raging fire, here’s my inventory of ways Asia could blindside the world.
Instability in Beijing. China’s 2016 is already off to a bad start, if yesterday’s 7% plunge in CSI 300 stocks is any guide. We can debate how far gross domestic product slipped last year (Lombard Street Research says to 3.7%), but the key indicators will be in the halls of Beijing power and the streets from Harbin to Chongqing. A chill beyond anything China has seen since the 1990s is descending on living standards and corporate profits. At the same time, its share of the world’s most polluted skies, rivers and food supplies is rising apace. President Xi Jinping’s efforts to replace smokestack industries with a services sector independent from state-owned enterprises have been glacial, at best. His go-slow approach could backfire and catalyze a bull market in protests. Not of the magnitude of Tiananmen Square, perhaps, but enough ground-up pressure to spook markets and fuel power struggles between Beijing’s reformer and advocates of the status quo. It’s no coincidence that Xi’s most ambitious campaign has been policing chatter in cyberspace -- including seven-year prison stints for “spreading rumors” and forcing companies to rat out users engaged in “security incidents” -- under vague definitions that might even shock George Orwell. All signs point to a Chinese leader afraid of his 1.3 billion people and running out of options to keep them -– and vital allies in Beijing -- happy. That could lead to policy missteps and misunderstandings that unnerve markets.
Terrorist mayhem. In the weeks after the Paris attacks in November, Russia issued a sobering warning to Thailand: Islamic State sent a 10-member squad to kill tourists. Indonesia, site of a devastating 2002 attack in Bali, also is tightening security. But what if China is the real soft target? On Nov. 15, Foreign Minister Wang Yi framed China as an equally vulnerable victim of terrorism at a Group of 20 meeting in Turkey. The fight against militant groups demanding independence in China’s northwestern Xinjiang region, Wang said, “should become an important part of the international fight against terrorism.” Beijing could be cynically conflating its domestic security priorities with Islamic fundamentalism -- or warning of things to come. Imagine the political chaos a single suicide bomber on a bullet train could generate. Or what if Uyghur militants targeted, say, the giant Three Gorges Dam? That would be CNN’s story of the year.
Japanese debt crash. Yes, I know: shorting Japanese government bonds is the ultimate “widowmaker” trade. Certainly, outspoken Japan-crash prognosticator J. Kyle Bass of Hayman Capital Management can’t be happy. In June 2011, Bass said his bet against JGBs was even “more compelling” than his rationale for shorting U.S. subprime debt. A country running out of people can’t manage the world’s biggest debt burden indefinitely. Yet each time the bears predict collapse, 10-year yields push lower and lower (0.26% these days). Could this trade finally pay off in 2016? Japanese debt is as mispriced as any drawing interest from speculators. And for all his talk about fiscal austerity, Prime Minister Shinzo Abe is borrowing with abandon. In April, the Organization for Economic Co-operation and Development warned a debt-to-GDP ratio approaching 250% will swell to more than 400% by 2040 without reforms. Last year, Tokyo’s debt topped the quadrillion-yen mark (more than $10 trillion). Japan has three options: make more babies in a hurry, import millions of workers or slash borrowing drastically. Since this government is likely to do none of the above, Japan’s bond bubble will only grow –- until it can’t any longer.
Philippine election intrigue. Public hangings in Manila? Observers of Benigno Aquino’s Philippines these last five-plus years find it hard to fathom one of Asia’s thriving democracies going all “Game of Thrones.” But then few foresaw Rodrigo Duterte pulling ahead of the pack as a pivotal May presidential election approaches. The Davao City mayor is getting lots of traction as the law-and-order candidate to assume governing responsibilities in a geopolitically vital economy. Prone to dropping F-bombs on the campaign trail, self-proclaimed womanizer Duterte can make Trump seem tame by comparison. His suggestion drug dealers should be executed and that public hangings will become the law of land are resonating with voters. Duterte’s surge reminds us how ephemeral Philippine renaissances can be. The next leader must build on Aquino’s success in reviving growth, strengthening governing institutions and rising Manila’s diplomatic game. A nation on the mend could see an abrupt about-face in priorities and tactics. The Philippines, remember, is embroiled in territorial disputes with China. It would be fascinating –- and potentially scary –- to see how a Duterte presidential palace might lash out at Beijing. F-bomb-free, one should hope.
Fireworks in the Asian seas. That brings us to rising tensions over tiny islands, rocks and atolls. Manila, for example, has brought Beijing before an international court in The Hague over a series of coral reefs and shoals. Beijing claims pretty much all of the South China Sea, blowing off overlapping ones from Brunei, Malaysia, the Philippines, Taiwan and Vietnam. Yet the plot is thickening now that the U.S. and Japan are increasing naval patrols in ways that enrage Xi’s government. Tokyo is engaged in its own escalating tit for tat over a small cluster of uninhabited islands the Japanese call Senkaku and the Chinese refer to as Diaoyu. And Abe, remember, just reinterpreted Japan’s war-renouncing constitution as Washington drives warships through contested waters, much to China’s chagrin. All this potential war gaming, coupled with Asia’s accelerating arms race, makes for dismal economics. You don’t need Tom Clancy’s imagination to see how two ships, or fighter jets, colliding could quickly escalate into full-blown conflict. Rising nationalism in Beijing, Tokyo and one could argue Washington as Republicans vie for the White House make it unlikely cooler heads will prevail in Asia’s seas.
There are myriad other wild cards to ponder, including Taiwanese voters this month electing Tsai Ing-wen as the island’s first female president. Her Democratic Progressive Party, one that’s long favored independence over rapprochement, returning to power deeply worries Beijing. Might Najib Razak’s party in Malaysia grow tired of the numerous scandals swirling around the prime minister and seek new leadership? Could Kim Jong Un do something crazy in North Korea? How about the military junta running Thailand into the ground be challenging by another band of power-hungry generals? What if further declines in commodities pushed Australia into its first recession in two decades or destabilized President Joko Widodo Indonesia? All we can say is stay tuned, fasten your seatbelts and hope the Black Swans remain out of sight
-------------------------------
| To: robert b furman who wrote (17235) | 10/27/2015 9:04:40 PM | | From: John P | 6 RecommendationsRecommended By
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by David Stockman • October 20, 2015
davidstockmanscontracorner.com
The proverbial peddlers of Florida swampland can now move over. They can’t hold a candle to the red suzerains of Beijing.
The latter had drawn a line in the sand at 7.0% GDP growth. Conveniently enough, the “consensus” estimate of so-called street economists was pegged at 6.8% for Q3, thereby giving authorities one thin decimal point through which to thread a “beat” at 6.9%.
By golly they did it!
Even then, China’s Ministry of Truth had to fiddle down the GDP deflator to negative 0.5% (for the second time this year) in order to hit the bulls eye. And that’s exactly the point.
No real world $10 trillion economy plagued with all of the turmoil evident in China’s whipsawing trade data or its volatile real estate development sector or its faltering rust belt and commodity-based industries can possibly deliver absolutely stable GDP numbers to the exact decimal point quarter after quarter.
In fact, the odds that these reports represent anything other than goal-seeked propaganda are so overwhelmingly high that they perforce raise another more important question. Why does Wall Street and its servile financial press not issue a loud collective guffaw when they are released?
But no, the Wall Street Journal took it all very seriously, noting both the “beat” and China’s claim that the “miss” wasn’t a miss at all:
The better-than-expected result—a Wall Street Journal survey of 13 economists forecast a median 6.8% gain—is likely to renew debate over the accuracy of China’s growth statistics…….Speaking at an event to promote entrepreneurism in Beijing on Monday, Premier Li Keqiang said “even though it was 6.9%, it is still a growth rate of around 7%.”
Right. China’s #2 communist boss is out promoting the “enterprenurial spirit” while emitting central planning propaganda to the decimal point.
You might find the irony exceptionally rich, but there is a larger message. Namely, the true size of China’s economy is unknowable to the nearest trillion or even several trillions. But that does not prevent most of Wall Street from taking seriously each and every word of China’s self-evidently clueless statist rulers spouting growth rates to the decimal point.
In truth, Wall Street has become so intellectually addled from its addiction to central bank enabled gambling that it no longer has a clue about what really matters. That’s why the next crash will come as an even greater surprise than the Lehman meltdown, and will be far more brutal and uncontainable, as well.
Yet the evidence that a China-led crash is on its way is hiding in plain sight. And what is being blithely ignored is not merely the blatant inconsistencies in its economic numbers—–such as the fact that electricity consumption has grown at only a 1.3% rate over the past year——or that its commerce with the outside world has shrunk drastically, with imports down by 23% and exports off by 3-6% in recent months.
Instead, the evidence that China is a slow-motion trainwreck lies in the very consistency of its Beijing-cooked numbers. Apparently, no one has told its credit-happy rulers that printing precise amounts of new GDP quarter after quarter by issuing credit at double the rate of nominal income growth will eventually result in the mother of all deflationary collapses.
Stated differently, if the pattern of debt versus GDP shown below is pursued long enough, the world’s greatest open air construction site will fall silent. Everything which can be built will have been delivered; any cash flow which can be encumbered with more debt will have been levered-up; any pretense that financial institutions are solvent will have given way too soaring defaults; and the Wall Street delusion that the primitive central planners of red capitalism had a iron grip on China’s runaway expansion will have been revealed as a snare and delusion.
Accordingly, the only thing that really counted in yesterday’s release was that credit is still growing at nearly 12% or at 2X the 6.2% gain in nominal GDP. And as is also evident in the chart, this massive and aberrational debt versus income gap has been underway as far back as the eye can see.
Indeed, its goes all the way back to Mr. Deng’s moment of enlightenment 25 years ago. That’s when he discovered a printing press in the basement of the PBOC and concluded that communist party power might better be preserved by running these presses red hot than by Mao’s failed dictum that power descends from the white hot barrel of a gun.
In any event, why in the world would anyone in their right mind think this crucial chart can be extended toward the right axis much longer. Assume 10 more years of 12% credit growth, for example, and China will have $90 trillion of total debt or 50% more than the already staggering amount carried by the US economy.
At the same time and given that China’s nominal GDP growth is descending in Gartman fashion from the upper left to the lower right, assume the very best outcome for nominal income. That is, posit that somehow China manages to achieve ten more years of this quarters’ 6% nominal growth. So doing, you get a mere $17 trillion of GDP.
Everywhere and always, however, a 5X total leverage ratio on an economy is a recipe for crushing deflation. In fact, it has never happened before in modern times except for Japan after 1990; and Japan at least had some semblance of functioning markets separate from the state and the rule of commercial law, contracts and bankruptcy.
By contrast, when China fully plunges into its inexorable deflationary spiral the rulers of red capitalism will have no choice except to resort to Mao’s preferred instruments of rule—–paddy wagons and machine guns—-in order to quell an outraged citizenry. After all, Mr. Deng told China’s newly ascendant capitalists that it is glorious to be rich, but did not explain that printing press prosperity ultimately results in a crack-up boom.
Stated differently, the recent 18-month rise and then overnight collapse of $5 trillion of phony market cap in the Chinese stock market gave rise to utter panic and mindless expediency in Beijing, including a de facto bailout of billionaires. China’s red rulers apparently feared that the 90 million angry stock market speculators would be no match for its 70 million party cadres——especially since most of the latter were foremost among the former.
Yet what will happen when China’s hideously inflated real estate and land values succumb to the deflationary wringer? And hideous is not too strong a word: in many urban areas housing prices have reached 15-30X the median income.
Well, there are 65 million drastically over-priced, empty apartments in China because its rulers told speculators and the rising middle class that housing prices could never fall——that they were the next best thing to a piggy bank. Accordingly, the last phase of China’s madcap construction boom is likely to be a manic spurt of prison building to accommodate the millions of irate citizens who are destined to experience China’s turbo-charged version of 1929.
The other number number in the Q3 release that has been drastically misinterpreted is the reported 10.6% growth of fixed asset investment. Needless to say, this was described as “disappointing” when it is actually a screaming symptom of China’s terminally deformed economy. If it had any hope of avoiding a crash landing, fixed investment in its fantastically overbuilt public facilities and industrial capacity would be sharply negative, not still growing in double digits.
Owing to the cardinal error embodied in Wall Street’s self-serving rendition of Keynesian economics, however, China’s fatal dependence on erecting economic white elephants and what amount to public pyramids in the form of unused airports, train stations, highways and bridges, is given hardly a passing nod. That’s because it is assumed that some way or another China will make the transition to a services and consumption based economy just like the good old shop-till-they-drop US of A.
Let’s see. When China finally stops its borrowing binge, these putative shoppers will need to finance their purchases out of current incomes. Yet is not the overwhelming share of household income in China currently earned from the supply chain for fixed asset investment and construction and from the export of cheap goods to already saturated and debt-besotted DM markets?
Just consider the fantastical reality that China’s 2 billion ton cement industry produced more in three years than did the US industry during the entire 20th century. When they finally stop building roads, apartments and factories, therefore, it is not just the cement kilns which will shutdown, but a whole network of gravel haulers, chemical plants, cement truck fleets, construction equipment suppliers, work site service vendors and much more reaching deep into the interstices of China’s hothouse economy.
Likewise, when rebar and other construction steel demand collapses and the rest of the world throws up barriers to China’s surging steel exports, as it surely will and is already doing, the ricochet effects on China massively overbuilt 1.1 billion ton steel industry will be far-reaching. The incomes of coal barons and blast furnaces workers alike have already taken a pasting, and the downward spiral is just getting started.
And wait until China’s newly minted auto dealer lots become backed-up with unsold cars as far as the eye can see. Then its 25 million unit auto industry will tumble into a depression unlike anything since 1929 when Detroit’s production plunged from 6 million cars/year to less than 2 million.
All of those suddenly unemployed auto, steel, rubber, glass, upholstery etc. workers did, in fact, economically “drop”. But it wasn’t from an excess of shopping!
In short, the affliction of Keynesian economics brought many ills to the modern world, but repeal of Say’s Law was not among them. You can have a one-time credit party, but when it inevitably ends, consumption spending defaults to that which can be financed from current incomes. Consumption is the consequence of production and income, not its cause.
Yet crack-up booms eventually destroy the bloated and unsustainable incomes generated in the raw materials, capital goods and consumer durables sectors during the boom phase. Accordingly, even the red suzerains of Beijing can not get from here to there. The phantom incomes that resulted from paving nearly half of the Asian continent occupied by 20% of the world’s population must inevitably shrink, meaning that China’s consumption and service spending will falter, too.
Stated differently, China’s red capitalism is the new black swan. There is nothing rational, stable or sustainable about it. Moreover, the consequence of its pending collapse will be literally earth shattering.
That’s because in recent years it has accounted for a lot more than the one-third of global GDP growth conventionally cited. The latter is just a measure of border-to-border economic statistics.
But the second and third order effects are equally large. From the bowels of Australia’s iron ore mines to the top of Dubai’s pointless 100 story office towers, the entire warp and woof of the global economy has been distorted and bloated by the central bank money printing spree of the last two decades, led by the red credit machines of Beijing. Everywhere economies have succumbed to over-building, over-consumption, over-financialization and endless dangerous, unstable speculation.
So forget the cleanest dirty shirt meme or the preposterous Wall Street nostrum that the US economy has been “decoupled” from the rest of the world. That’s unadulterated hogwash, and its means that the stock market and risk assets are heading for a thundering crash.
After the fact, of course, Wall Street will discover that the world economy was unexpectedly taken down when the suzerains of Beijing were unable to perpetuate the Red Ponzi.
But just like last time during the mortgage and housing meltdown it was starring them in the face all along. Here is what happened to the home ATM piggy-bank that fueled the Greenspan Boom and that gave rise to the Wall Street illusion that consumption spending is the motor force of economic life.
From a peak mortgage equity withdrawal rate (MEW) at 9% of DPI or nearly $1 trillion per year prior to the crisis, MEW has been negative ever since. That is, it has subtracted from consumption, not added. Not one in one hundred Wall Street economists could have correctly projected this chart in 2007 when they were slobbering about the goldilocks economy.
Needless to say, when it comes to the wounded elephant in the room this time around—-the tottering edifice of the Red Ponzi——they are still slobbering.
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| To: John P who wrote (17567) | 1/7/2016 10:32:29 PM | | From: John P | 4 Recommendations of 17739 | | | We live in a big Global world ... when Trillions of dollars of expansion stops, reverses and then contracts it impacting all global markets.
ANALYSIS-Forex reserves unwind could reverse bond supercycle
Thompson Reuters Sept 2nd 2015
China's summer shock may mark the end of an era of globalization that helped define world markets for more than a decade. Investor anxiety about the consequences is well-founded.
Beijing's integration into the global economy since 2002 reshaped the financial as well as economic landscape - mainly by the way China itself and the economies it supercharged with outsize demand for raw materials banked the hard cash windfalls they earned over the following 12 years.
According to the International Monetary Fund, the dollar value of foreign currency reserves held by all developing nations ballooned by almost $7 trillion in just one decade to a peak of some $8.05 trillion by the middle of last year.
While China was the main driver, accounting for about half of that increase, its economic boom created a commodity supercycle that flooded the coffers of resource-rich nations from across Asia to Russia, Brazil and the Gulf.
As the vast bulk of this hard cash was banked in U.S. Treasury and other low risk, rich-country bonds, they were at least one critical factor in the halving of U.S. Treasury and other Group of Seven government borrowing costs over the same period.
Alongside the disinflationary impact of China's low cost labour on western goods imports and wages, this reserve stash helped extend what has now been a 20-year bull market in bonds.
What's more, the drop in yields, by skewing relative returns between stocks and bonds and also the relative cost of capital for companies, also at least partly underwrote a post-credit crisis surge in equity prices to successive records.
Reverse that bond buying, even at the margin, and world asset markets may have a major problem.
That's especially so at a time when the big other marginal bid for bonds, the U.S. Federal Reserve's quantitative easing programme, has ended and when western recoveries are pressuring the Fed and others to normalize near zero interest rates.
RESERVE GROWTH CRESTS
As China's economy slows to its weakest in 25 years this year and capital flows out of the country, pressure on the recently devalued and loosened yuan peg means the People's Bank of China has sold hundreds of billions of dollars to shore up its currency over the summer.
Dutch bank Rabobank estimated China's central bank sold $200 billion of reserves in the last weeks of August alone.
Along with the pressure of looming Fed tightening and a higher dollar, the ebb of Chinese demand for commodities and slump in energy and metals prices has seen emerging market currencies plummet everywhere. And just steadying the capital exit is starting to strain their coffers.
, and this Emerging market forex reserves fell by about half a trillion dollars between mid-2014 and the end of the first quarter of 2015, IMF data shows is likely far from the end.
Deutsche Bank estimated on Tuesday the high water-mark of almost two decades of reserve accumulation had now been reached and central banks will by the end of next year dump as much as $1.5 trillion to counter capital outflows.
(Editorial note by JJP.... this $1.5 to $2 Trillion reduction of global currency reserves was forecast by me as a sidebar statement in my April 5th 2015 post...these are the huge Global shifts that are game changers)
Message 30015282
Once Over $12 Trillion, the World’s Reserves Are Now Shrinking
(This is a big deal .. This is the global downshifting in the creation of what is already half a trillion dollars and will continue to trend downward with another 1 to 2 Trillion Dollars of Reserves leaving the system due to the change in momentum and the wildly wicked world of Negative interest rates which we are seeing in way too many places. such as Switzerland, Sweden Denmark and in other aspects of our Gobal Macro Financial Structure........JJP)
Bond investors are nervous of the fallout.
"The process of reserve reversal has only just started," said Chris Iggo, Chief Investment Officer, Fixed Income at Axa Investment Managers.
"We could be on the verge of a scenario that sees a reversal in the trend of declining global goods prices, a partial reversal in U.S. monetary policy and a reversal of the balance sheet expansion that allowed emerging market central banks to grow their foreign exchange reserves," he added. "The upshot? Significantly higher US Treasury yields."
DEFLATION OR RESERVE BUST?
For some, it may seem counter-intuitive that a China slowdown or financial shock lifts bond borrowing rates at all.
As the Shanghai stock bubble imploded in July, the yuan wobbled and the world's second-biggest economy shuddered, the first wave across markets was to sink commodity prices further, throw doubt on inflation targets and lower long-term interest rate horizons yet again.
It's not hard to see why. Crude oil prices, which had already halved over the previous 12 months, lost another 19 percent after midyear to six-year lows. Raw material prices more broadly, as captured by the Thomson Reuters Commodity Research Bureau's index, slumped to their lowest in 12 years.
The effect of international commodity price moves on already near-zero inflation rates was to push back the expected timing of interest rate rises in the United States, Britain and elsewhere. Suddenly, silver linings for investors reappeared.
But the parallel narrative of the decade-long reserve unwind could well neutralize much of that for bond pricing.
Iggo pointed out that even as China's emergence over the past 15 years fueled a trebling of the CRB commodity price index in just six years to 2008, it was disinflationary on balance for western economies - mainly due to low-cost labour and exports.
The flip side now is that the recent slump in the CRB to 2003's lows may not be enough to prevent cost pressures building in recovering western economies over time and may only stay central bank tightening temporarily as a result.
"The peak in bond demand is probably behind us," said Deutsche strategist George Saravelos.
---By Mike Dolan
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Message 30234098
| To: Fintas who wrote (16909) | 4/5/2015 11:57:48 PM | | From: John P | 6 RecommendationsRecommended By
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of 17241 | | Once Over $12 Trillion, the World’s Reserves Are Now Shrinking
(This is a big deal .. This is the global downshifting in the creation of what is already half a trillion dollars and will continue to trend downward with another 1 to 2 Trillion Dollars of Reserves leaving the system due to the change in momentum and the wildly wicked world of Negative interest rates which we are seeing in way too many places. such as Switzerland, Sweden Denmark and in other aspects of our Gobal Macro Financial Structure........JJP)
The decade-long surge in foreign-currency reserves held by the world’s central banks is coming to an end.
Global reserves declined to $11.6 trillion in March from a record $12.03 trillion in August 2014, halting a five-fold increase that began in 2004, according to data compiled by Bloomberg. While the drop may be overstated because the strengthening dollar reduced the value of other reserve currencies such as the euro, it still underlines a shift after central banks -- with most of them located in developing nations like China and Russia -- added an average $824 billion to reserves each year over the past decade.
Beyond being emblematic of the dollar’s return to its role as the world’s undisputed dominant currency, the drop in reserves has several potential implications for global markets. It could make it harder for emerging-market countries to boost their money supply and shore up faltering economic growth; it could add to declines in the euro; and it could damp demand for U.S. Treasury bonds.
“It’s a big challenge for emerging markets,” Stephen Jen, a former International Monetary Fund economist who’s co-founder of SLJ Macro Partners LLP in London, said by phone. They “now need more stimulus. The seed has been sowed for future volatility,” he said.
China Sells
Stripping out the effect from foreign-exchange fluctuations, Credit Suisse Group AG estimates that developing countries, which hold about two-thirds of global reserves, spent a net $54 billion of this stash in the fourth quarter, the most since the global financial crisis in 2008.
China, the world’s largest reserve holder, together with commodity producers contributed to most of the declines, as central banks sold dollars to offset capital outflows and shore up their currencies. A Bloomberg gauge of emerging-market currencies has lost 15 percent against the dollar over the past year.
China cut its stockpile to $3.8 trillion in December from a peak of $4 trillion in June, central bank data show. Russia’s supply tumbled 25 percent over the past year to $361 billion in March, while Saudi Arabia, the third-largest holder after China and Japan, has burned through $10 billion in reserves since August to $721 billion.
Euro’s Decline
The trend is likely to continue as oil prices stay low and growth in emerging markets remains weak, reducing the dollar inflows that central banks used to build reserves, according to Deutsche Bank AG.
Such a development is detrimental to the euro, which had benefited from purchases in recent years by central banks seeking to diversify their reserves, according to George Saravelos, co-head of foreign-exchange research at Deutsche Bank.
The euro’s share of global reserves dropped to 22 percent in 2014, the lowest since 2002, while the dollar’s rose to a five-year high of 63 percent, the International Monetary Fund reported March 31.
“The Middle East and China stand out as two regions that are likely to face ongoing pressures to run down reserves over the next few years,” Saravelos wrote in a note. The central banks there “need to sell euros,” he said.
The euro has declined against 29 of 31 major currencies this year as the European Central Bank stepped up monetary stimulus to avert deflation. The currency tumbled to a 12-year low of $1.0458 on March 16, before rebounding to $1.0981 at 11:11 a.m. on Monday in Tokyo.
Growth Slows
Central banks in emerging nations started to build up reserves in the wake of the Asian financial crisis in the late 1990s to safeguard their markets for periods when access to foreign capital dries up. They also bought dollars to limit appreciation in their own exchange rates, quadrupling reserves from 2003 and boosting their holdings of U.S. Treasuries to $4.1 trillion from $934 billion, data compiled by Bloomberg show.
The reserve accumulation adds money supply to the financial system -- each dollar purchase creates a corresponding amount of new local currency -- and helps stimulate the economy. Annual monetary base in China and Russia grew at an average 17 percent in the decade through 2013, data compiled by Bloomberg show. The expansion rate tumbled to 6 percent last year.
While central banks have other ways of pumping cash into the banking system, such moves without the backing of increased foreign reserves could end up weakening their currencies further -- an outcome they may want to avoid.
“The swing in global foreign exchange reserves is one key measure of the global liquidity tap being turned on and off,” Albert Edwards, a global strategist at Societe Generale SA, wrote in a note on March 6. “When a regime of loose money suddenly ends,” emerging-market asset prices “are usually one of the first casualties,” he said. |
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