(…) Yet the underlying picture in China is going from bad to worse. Robin Brooks at Goldman Sachs estimates that capital outflows topped $224bn in the second quarter, a level “beyond anything seen historically”.
The Chinese central bank (PBOC) is being forced to run down the country’s foreign reserves to defend the yuan. This intervention is becoming chronic. The volume is rising. Mr Brooks calculates that the authorities sold $48bn of bonds between March and June.
Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year. These are frighteningly large sums of money (…)
This is not surprising, after all the main reason for the outflows, an overvalued real exchange rate, is still in place. Further, Chinese creditors are systematically short USD (to the tune of 1 trillion) mainly backed with cash flow negative projects. I expect the outflows to continue, as the repercussions of the stock market crash further diminish the demand for CNY.
If China does not want to loosen its peg, it has no choice but to sell US-Treasuries. I do not know whether the impact on the Treasury market is big enough, but given that the Fed some ten years ago was concerned about a global “savings glut” having impact on long-term rates, it could equally be worried about the “reverse savings glut”. Whether the Fed hikes or not, USD liquidity is tightening…