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



  1. VC,

    Do you have any thoughts on how this will affect the Yen?

    Do you have any thoughts on the Yen in general (especially against the USD)?

    I read this on Mish’s blog recently:

    It appears Abe was successful in crushing the Yen. The current price is much closer to prices I remember from a trip taken in 2001 which are deemed “good for exporters”. It is hard to tell what is “normal” or where the value of the Yen lies. The government financing position seems increasingly desperate, it is hard to believe the Yen would strengthen but then, that’s what it did in 2008-2009 when the carry trade unwound.

    1. Hi,
      have been short the Yen since 2012, but started trimming more than half of my position in the second half 2015. I still have a small position short…
      Theoretically, the yen should be affected, as China is Japan’s most important trading partner. There also seem to be links between the Chinese and Japanese wholesale banking system…
      However, It is just not as clear cut as in Australia’s case for instance.
      I mean, the Japanese do produce stuff using their intellectual capital and given a low enough exchange rate the rest of the world will and CAN buy its products (cars, gadgets, fashion etc)
      Also Japan has a lot of foreign assets, not financed with USD debt…the net government position is improving with every depreciation
      Then again, central banking in Japan is insane in it’s won way…
      On the other hand there is the percieved “safe heaven” status you are mentioning
      To sum up: it is probably in the “too difficult” basket for any significant position which is why I have trimmed my bets..

      1. Hi VC,

        Thanks for the reply. It made for interesting reading.

        I wanted to note this chart:

        It appears you have a fairly highly calibrated exchange rate valuation tool (ie, logical framework) if you shorted the yen in 2012. Your timing was essentially impeccable. Ironically, 2012 was the time I became very interested in Japanese equities. I bought a well-known company that I considered grossly undervalued (it was and still is, but it rode the currency depreciation wave quite nicely) and I also began buying a basket of Japanese “net-nets” in the Ben Graham style which also have performed nicely, though it’s hard for me to say if it was because of the value of the strategy or the sharp fall in the currency that caused these share prices to rise. I haven’t done even a cursory analysis of my performance against the broader Japanese market so I can’t say if I would’ve been better off just buying a major index and letting the currency tail winds push me along. I really didn’t have a currency view at the time, I was looking for cheap balance sheets.

        The personal problem I face is that I have generated some nominal profits from this trading activity since 2012, and I keep wondering if I should convert to USD at these prices and take the big FX hit, or try to make a “currency play” and hold on for a strengthened Yen so I can make more of my nominal profits real in USD terms. I won’t be so presumptuous as to ask you to make this decision for me, but I thought I’d put it out there why I am so curious.

        If the Fed has no exit strategy, the BoJ seems even worse off. How their strategy could be “good” for the Yen is beyond me. And looking at the history of the last 15 years, today’s Yen price versus the USD looks more normal than that which persisted during the global financial crisis. In other words, “Abenomics” looks more normal, than radical, from the currency standpoint.

        I happen to share your pessimistic view of short-term global financial stability and just keep wondering if I would be better off holding the Yen for now and seeing if another financial calamity leads to Yen strength and a better opportunity to trade back (or even re-invest in newly cheap Japanese securities?) But at some point I think I am gambling with the devil.

      2. Hi.
        I do not have timing skills.
        After Abenomics was announced there was a cleary idenifiyable catalyst given the fundamental background. However, I did not pick the bottom, but I have captured the bulk of the trend. I did not have a big position though..
        Unfortunately, right before I shorted the JPY had sold my Japan index ETF as I was reducing exposure, so I basically just made up what I missed…
        Your arguments are all valid, it is just not clear to me which argument wins. And in a real crisis all stocks go down-even the cheap ones…
        So I try to be patient, because I feel that when this is over, there will be real quality assets at good prices…

  2. Hi VC,

    I’m still new to the macro game so please bear with my ignorance. The story here seems to involve the depletion of China’s FX reserves, maybe eventually accelerating to a precipitous rate at some point (domestic credit event?). What I’m wondering is how does that affect certain markets such as the treasury or abs/mbs markets? Since it’s long been rumored that these constitute the vast majority of China’s fx reserves, would there be a blowout in yields of these markets if 2T+ of sell orders were to hit the market in a relatively short period of time? Or would this largely be fully absorbed by the worldwide insatiable hunger for yield?

  3. Hi Kevin,
    this is a difficult question. In the long run, I would say that most assets will be lower in price, but in the short therm some of them, for instance treasuries, might profit from a flight to quality bid. Also don’t forget that it is always politically easier for CBs to buy their own government bonds, so this is where a likely intervention would be effective first. The market may anticipate that and the prices of treasuries might stay firm despite everything else falling apart…
    That’s one for the “too hard” basket 🙂

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