Month: January 2016

China’s Outflows are far from over

Via today’s FT (here) comes this interesting chart,


It shows the evolution of offshore renmimbi deposits over the last decade. Unsurprisingly, demand for Yuan has been falling recently after literally exploding since 2009.

But how far will it go? Will it stabilize at this level?

I believe the outstanding will revert back to its pre-2009 (i.e. pre-QE) level, as most of the demand has been speculative in nature. If offshore renmimbi accounts had been necessary for conducting Chinese trade, they would have existed before 2007 when global trade was booming. In other words: it is not a coincidence that those deposits took-off after the fed had committed itself to an easy money policy luring speculators (mostly Chinese corporations) into the carry trade. Now that this trade has become unattractive, so has holding renmimbi outside of China where you do not need it to pay your bills/taxes.

At a more fundamental level, it is atypical to see a currency offshore, unless – of course – if you are talking about the reserve currency (the USD and the EURO in CEE).

But is the CNY not a reserve currency, now that it has been included into the SDR basket and thus shouldn’t we expect it to “appear” offshore?

No, no and no!

A reserve currency CANNOT be introduced by political fiat, it is the result of preferences of market actors globally. Second, reserve currency status seems to be something of a “winner takes all” phenomenon, given that even the mighty EUR and JPY don’t appear in offshore accounts that much. With the USD rising, its reserve currency status seems certain for the forseeable future…

Ask yourself: how likely is it that market participants will voluntarily choose to transact in a currency that is not freely convertible and whose percieved short-sellers are threatened with jail or worse?

Now you know where demand for CNY is headed…

Disclosure: short CNH and AUD


Getting interesting in China

As suspected in my last post (here) capital outflows are increasing, rather than abating. From Deutsche Bank,

China Dec FX reserves was just released at $3.33trn, a drop of $108bn from prior. This was much worse than market expectation and the lowest level since December 2012. After adjusting for FX valuation ($17.2bn), our model estimate possible intervention to be around $125.5bn. This would be the largest USD selling performed by the authorities on record. Do note in August when China had a one-off devaluation, USD selling was only around -$100bn. Given the sizeable drop in FX reserves, FX outflows could be around $156bn, also the largest on record.

I do not believe for one second that China is not massaging its reserves – that’s what central banks have done historically when it gets tough. You can safely assume that the true picture is likely to be uglier…

This is by no means confined to the Chinese. Before Christmas some eminent German newspapers came out with a story that the ECB has purchased much more government (read:PIIGS) bonds than previously disclosed. See the full story (here, unfortunately only in German). The english-speaking press has curiously remained silent over this issue, at least I could not find anything.

Is this because they are predominantly Keynesian and think it is a good thing anyway, if markets (and Germany) are duped into doing the “right thing”?

Disclosure: short AUD, short CNH