China Waking Up? Central Bank Now Selling Forex Reserves To Support Yuan

Marking a clear break with its policies over the last several years, the People’s Bank of China (PBoC) announced a second consecutive month of foreign exchange outflows in November, a move designed to support the value of the yuan. China’s currency intervention came alongside a report showing property prices continuing to fall, as Beijing clamps down on what many see as a dangerous real estate bubble. The Red Dragon appears to be waking up.

Chinese policymakers are doing everything they can to avoid a so-called hard landing, a possibility they have only recently acknowledged. Data released Monday showed the country’s largest banks and the PBoC sold 27.9 billion yuan in November, or $4.4 billion.

Foreign reserve sales accelerated from October, when they hit 24.9 billion yuan ($3.9 billion) and mark a big change in China’s reserve accumulation stance of the past several years. Through the biggest net sale since December 2007, according to Dow Jones, China’s central bank is making it clear that it intends to support the value of its currency to supplement stability. Selling foreign reserves means the PBoC is raising demand for yuan denominated assets, fueling yuan strength.

Is anyone else bewildered by this article? In one breath the author says that the Chinese are strengthening the currency and in the next he says they are trying to engineer a soft landing. Are they not mutually contradictory?

In one breath the author says they want to bring down the housing prices and in the next breath he says they want to strengthen the domestic economy which is weak because of weak exports. How does strengthening the currency help exports? How does it help the domestic economy? How does it help real estate? How does it generate a soft landing?

This is not to say that hardening the currency is the wrong policy, it might be very much the correct policy, it is certainly one the United States has been negotiating for, but the inconsistencies are apparent.

Thanks for the citation to Gordon Chang. Although not specifically familiar with this article, I have been following the situation rather closely and have come to roughly the same conclusion as the author expressed in this vanity:

Black Swan

http://209.157.64.200/focus/f-news/2818760/posts

It includes these paragraphs:

“Daily we read of a rising tide of unrest in China with literally dozens of riots occurring somewhere every day over grievances which are papered over by a government induced real estate bubble. A government of elites has contrived to stay a half jump ahead of insurrection by raping the environment, inflating the economy, and generating a mercantilist expansion. The entire edifice is without honest transparency so that the central planners do not even know, and certainly cannot trust, the reported data upon which they must rely to shape the economy. They cannot know so they cannot be wise, even if such a thing were possible. One false step and the edifice implodes, yet every day the Chinese elites must take portentous decisions or be swamped by a demographic tsunami. As sure as human nature, wise men must eventually misstep and the Chinese economy must eventually come to its reckoning. When?

We commonly think of the Chinese economy as vibrant but actually it survived the crash of 2008 by massively inflating. It had to somehow cope with its teeming hundreds of millions of jobless. Although the resulting inflation was masked by its exports which created a positive trade balance, the problem had to be dealt with so the elites tried to tamper down inflation by belt-tightening. If they under shoot they will fail to control inflation and the real estate bubble will only inflate more. If they over shoot they will burst the bubble and crash the economy. Lately, it appears they have reversed course fearing that they have tightened too much.

To say that American conservatives are skeptical of the ability of elites to manage the world’s second-largest economy from the top downward is to belabor the obvious. But even if nine old men sitting in a room are wise enough to weave the Chinese economy through the thickets without a single misstep, the fate of China is not entirely in their own hands. China is utterly dependent on its markets in Europe and America because its own domestic economy is nowhere near the size which can sustain the country. “

IMHO...

Keeping the currency week would be trying to keep the pedal to the metal in terms of exports.

Domestically, people are using their cheap currency.

The planners wanted their citizens to produce a lot for export in exchange for little to no income and therefore basically no wealth accumulation. This gave China a cheap labor advantage and motivated (hungry) workers with few options.

Only a few business owners, the rest are serfs.

As exports collapse anyway due to their “customer” countries having their own problems, the export-driven growth can’t be sustained. Unemployment becomes a problem; weakening their currency is undoubtedly not helping to keep exports high, no matter how hard the pedal is pushed to the metal, exports are tailing off anyway.

If an economy is an import-based economy, a strong currency is preferable, as it lowers costs of commodities.

As their trade surplus shrinks, world commodity market prices are rising anyway due to worldwide demand, might as well start moving towards a strong currency instead of waiting for exports to really collapse, their employment bubble to break and their citizens then having trouble affording the necessities of life, food, fuel, etc.

I know they are worried a lot about inflation, which stirs up social instability and which a strong RMB would combat. They may also be worried about capital flight putting further downward pressure on the RMB. When capital outflows occur in the manner described in the article, RMB are sold and forex bought, putting downward pressure on the former.

I read Chinese and follow some of the Chinese media, and some media outlets are reporting bigger real-estate price declines than listed in this article. There's a backlog of unsold new homes in Shanghai, although in some cities away from the coast prices haven't started falling yet. There are also stories about real-estate offices closing left and right in Beijing and agents who sit around all day playing video games for lack of customers.

Based on data I've seen, the Chinese economy has been shifting away from overreliance on exports for a number of years now, so the effect of a stronger RMB on exports is probably not much on the CCP's mind. It may well be that the idea that the Chinese economy hinges on exports to Walmart is vastly overwrought, which is not to say that a major bubble is not popping now, nor that they aren't being damaged by Europe's travails.

It is contrary, from an economic perspective, to try to improve exports while strengthening the currency of your nation. However, the ChiComs have for nearly two decades kept their currency very weak compared to the currencies of the nations they export to. They did this to increase their exports. However, those nations have all resulted in massive bubbles and currencies that are on the verge of collapse. Those nations are rattling their sabres and talking about trade wars and high tariffs on imports. I have to assume that the ChiComs are trying to demonstrate that they are willing to “play fair.”

Aside from that, China has also resulted in a massive bubble and their inflation, though it has been reported to have been mild, turns out (based on asset valuation) to have been pretty strong. So, they want to strengthen the currency hoping that a small deflationary spin will offset an inflationary explosion or a deflationary spiral.

Also, keep in mind that the ChiComs were tremendous enablers to the debt saturation that their ‘investments’ in foreign bonds and other tools on the forex. They say they want to divest in order to strengthen their currency and exports, but that is not their true goal. Their true goal is to unload the worthless paper that is those currencies they acquired.

I can only assume that they will pump that liquid into their military. I suspect that in order to pump up their currency, they will also divest in the precious metals they’ve been acquiring at break-neck speed. Europe has started doing so, and this is evident in the direction of gold and silver. I’m keeping a close eye on silver, as it got too expensive for me, but is now coming back down into range. When the ChiComs dump some of their PMs, there will be a fairly heavy cost drop and it will be a good buying opportunity. But hey, that’s just my opinion, and I’m no investor or adviser.

I believe the ChiComs have figured out what all central bankers have known for two hundred years. That if you give a small, private association of businesses who should be competing with one another the right to monopolize and control the currencies of their nations, the result will be a continuous cycle of booms and busts, each bust worse than the preceding and that eventually all of this monetary manipulation results in a massive bust that results in depression.

It is too late for all nations that have followed this road. The currencies and the debt that inflated them have been ruined and we are going to need a massive reset which will result in depression or WWIII.

I think that the Chinese leadership has one fundamental and overriding principle and that is to stay ahead of insurrection by keeping the rice bowl going and that means by creating jobs for hundreds of millions. You are perfectly right, hardening the currency makes it more difficult to export and that was my point in criticizing the article, if the Chinese are determined to create jobs and they are able to do that by exporting, why are they making the currency more expensive?

I think you might be onto something and that is they might be temporarily indifferent to the hardening of their currency caused by sales of dubious paper issued by the United States and Europe. Some time ago a story crossed these threads of the wires to the effect that the United States through the Fed has been monetizing a terrifyingly high percentage of our debt. If this is continuing to be the case, the Chinese recognize the end is nigh-a conclusion one can draw from the last paragraph of your post. Therefore Chinese are dumping paper and running to hard assets even at the cost of raising the value of their currency.

The Chinese do not actually have to sell our bonds, they simply have to stop rolling them over and they will profoundly shape the international bond market.

It is also possible that China is in much worse shape than we think and they are bringing in currency as fast as they can to put out fires. In other words, they cannot feed starving millions American debt paper, they must buy rice and wheat etc.

You partially answered the question you asked in your first paragraph.

The ChiCom leadership is afraid of riots. The peasants gave up agriculture and moved to the cities to work in factories. Now the factories are not producing as much, there is increasingly less work, and the houses that these peasants purchased at the peak of the boom have lost in some cases more than half their value. The people there are very angry and have begun demonstrating. As I said previously, the ChiComs are trying to prevent as far as possible any further asset devaluation by creating a mild deflationary uptick. It won’t work, but that’s part of their goal.

Food will definitely be a problem there, and the ChiComs will cash in their investments to buy foreign food, which means our food. That will result in shortages here and an increased cost. Keep that in mind as this plays out and stock up on storable food (see the first part of my tagline).

They do need to unload their foreign investments. If they don’t, as those foreign currencies devalue, this will have the effect of over-heating their own currencies.

The Fed is definitely monetizing the debt and they are doing so through the equities markets, a double no-no. We have seen only mild inflation compared to the amount of new money because that new money never reached the second tier of money creation. The first tier is at the government and fed level, the approval, the digital ‘printing,’ and the lending of the new money to the primary borrowers through the discount window. The second tier is the second line of banks making that money available to people on the street through loans. That money never reached the second tier. It was borrowed by the primary tier taking advantage of the ZIRP and that money has been used for the past couple of years to artificially prop up the equities markets? Why? Because Obammie the Commie and the other socialist/communist Dems want everyone to believe the lie that they saved the economy by keeping the DJIA over 12K. Today’s completely fraudulent 300+ climb with no resistance and obscenely low volume is proof of the fact that the primary borrowers (Goldman Sachs, JPM, Citi, Chase and all the others) have been infused with liquid and that they are using HFT algorithms to pump the market up. This earns them profits and keeps the market high. The market also must be kept high because the pension and benefits of the public-sector unions were based upon the assumption that the markets would earn 8% profits every year, thus the DJIA has to be kept over 12K to keep those payments to the unions going. As close as I can figure, the DJIA should realistically be in the 6-7000 range, and that is based upon the assumption of a solid 3% economic growth every year for about the past decade, which is over optimistic, because most of that growth was the delusion of two bubble economies (the dot-com bubble and the housing bubble).

It will adjust, but the DNC is working very hard with the socialist banking cartel that is our Federal Reserve to try to time it so that it happens after 2012.

Regardless of when it happens, you can bank on the DNC blaming it on the TEA party or Republicans or conservatives. What else could we expect from the affirmative-action president who thinks his foreign policies rank up there in the top four presidents of all time?

Please have a look at my post #5.

I'm not sure that I can accept the idea of a conspiracy between the members of the Fed and the White House, all coordinated by Soros which would have to be the case if they were trying to time the reckoning but I do believe it is important to consider when the reckoning will come. Both of us believe that it is not to be avoided.

If it comes before the election, Obama will be defeated. If it comes after the election and Obama was voted out, the blame will fall on the Republican in the Oval Office because the electorate seemingly always reacts Pro hoc Proctor hoc.

If the reckoning comes with Obama still in office, it might well be used as a pretext for extra constitutional takeover.

It is interesting to speculate about the nature of the economy after a crash of the system, whether inflation, deflation, or stagflation. I am of the view that initially, at least, we will face deflation. I do not think we will get to inflation until we go through stagflation and I am not sure that we will ever get to inflation.

I say all of this in the context of trying to protect oneself beyond the survivalist level. If we go into deflation, gold and silver will lose value although perhaps not to the extent of paper assets. Foodstuffs will fare perhaps better. Gasoline, guns and ammunition, and medical supplies will probably fare the best. Real estate will be immune in the sense that it will float in the sea rising and lowering with the tide provided is not encumbered by mortgage and providing it is not expropriated. If you're sure we are going into inflation, add a mortgage that is if you are equally sure you can keep your job or source of income.

The real question will be not the degree of the wrenching of the system but the duration. Eventually the demographic and technological forces which are latent but growing inexorably will be unbound and a whole new economy will emerge. If you are George Soros and 33 instead of 83 you with look upon the new landscape which emerges with a high degree of cupidity.

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