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China's Yuan Drops Most In A Week As Property Developers Tumble | Zero Hedge
China’s Yuan Drops Most In A Week As Property Developers Tumble | Zero Hedge.
When we left China last night, it was all shits and giggles that bad news is great news and a Chinese stimulus plan will be here any minute to save the day. Having realized the sad fact that is not going to happen (as we explained here most recently) and the specter of banks runs looming, this evening’s session has seen property developer stocks tumble – retracing all of last night’s losses – the Yuan plunges by the most in a week back above 6.2150. Copper is holding in for now at the magic $300 level but corporate bond prices are falling once again (worst run in 4 months).
The Yuan is dumping at its fastest rate in a week…erasing all the hope-strewn gains from yesterday
Property Developers are taking it on the chin…
And it’s no wonder, as Bloomberg notes…
Chinese developers’ gross margins declined by a weighted average 294 bps last year.Most developers have forecast a recovery. Further declines in prices could present a threat.
…
Chinese developers that have reported 2013 results have set an average 2014 sales growth target of 16%, about half last year’s 30% rate. This is likely recognition of a need for better inventory management and of a more challenging sales environment. Developers will also probably curb construction because of slowdowns in some tier two and three cities.
…
Longfor Properties summed up the attitude among major Chinese and Hong Kong property developers in its company filings… .“In 2014, the Group’s key operating focus will be inventory clearance and cost control… For the coming 6-12 months period, we wil strive to reduce the leve of unsold inventory, hereby gradually improving our sale through rate.”
But apart from that… China’s fixed and the world economy will be back to normal as soon as the US weather clears up…
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The dominoes begin to fall in China
The dominoes begin to fall in China.
March 18, 2014
Bali, Indonesia
[Editor’s Note: Tim Staermose, Sovereign Man’s Chief Investment Strategist, is filling in for Simon today.]
Forget tapering. Forget Ukraine. The largest single risk to the world economy and financial markets right now is China.
What’s going on in China reminds me a lot of what I witnessed firsthand when I lived in South Korea in the 1990s, before that economy’s crash in 1998.
Just as China now, South Korea was an immature, state-controlled financial system funneling cheap money to well-connected and politically favored large enterprises.
Fuelled by a steady diet of cheap money, these companies kept adding capacity with no regard to profitability or return on capital. They simply focused on producing more stuff and expanding their size. They employed more people, and everyone was happy.
But, all the while, they were borrowing more and more money, until eventually they collapsed under the debt load when liquidity dried up.
Before Korea, the exact same thing happened in Japan, and a giant, unsustainable debt binge brought the “miracle economy” to its knees.
But the Korean and Japanese debt bubbles are nothing compared to what we see in China today.
Consider this: in the last five years, the Chinese created $16 TRILLION in credit that is now circulating in the economy… financing ghost cities and useless infrastructure projects.
Floor space per capita in China is now 30 square meters (about 320 sq. ft.) per person. Japan was at that level in 1988. And the economy burst the following year.
More astounding, this $16 trillion in credit is DOUBLE the $8 trillion in credit that China created in the previous 5,000+ years of its existence.
The Chinese government recognizes it has a problem. It realizes it can no longer keep the dam from breaking. And in the past week, it bit the bullet.
In the last two weeks, Chaori Solar and Haixin Steel were allowed to default, i.e. they weren’t bailed out.
This is the first time in China’s modern history they’ve had a default, let alone two. They can no longer keep the game up, and the dominoes are beginning to topple.
I cannot stress this enough. What we’re witnessing is a major paradigm shift.
Of course, the Chinese government claims they can control the impact of these “relatively minor” corporate defaults.
But as we saw during the sub-prime crisis in the Unites States, the complex web of inter-linkages in the financial system means they are playing with fire.
I expect many more defaults in China in the coming weeks and months. I expect some important Chinese financial institutions to get into trouble.
And I expect the Chinese government will completely lose control over the situation.
My recommendations are 2-fold:
1. If you have any exposure to Chinese stocks, or the Chinese Yuan, I strongly suggest you reconsider.
2. If you have investments in iron ore or copper producers, get out.
But it’s not all doom and gloom. It’s going to take time for China to suffer through this crisis. But, if the Chinese government lets the dominoes fall where they may, the country will be better off in the long term.
The lessons from markets such as South Korea and Indonesia, in aftermath of the 1997-1999 Asian economic crisis, are clear.
If China frees up and liberalizes its financial markets in the face of a crisis, writes off bad loans, and closes down insolvent banks, it will emerge in a much stronger position once the crisis blows over.
And there will be lots of money to be made buying good-quality Chinese shares during the crisis. But, for now, it’s time to brace for the downturn.
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Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters
Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters.
BY MARWA RASHAD
RIYADH, March 16 Sun Mar 16, 2014 7:58am EDT
Asked whether it made sense to consider diversifying the central bank’s reserves to include the yuan, also known as the renminbi, or explore a currency swap agreement, Mubarak said: “We think it is a stronger currency, but it is far from being a reserve currency at this stage.”
“But indeed it represents a good option and a good diversifier and we have seen that some of the central banks have some reserves in the renminbi,” he said at an annual news conference in the Saudi capital.
Mubarak, who does not comment on policy outside of annual press briefings, did not say, however, whether the central bank had considered adding the yuan to its portfolio of net foreign assets. Its reserves, the vast majority of which are believed to be in U.S. dollars, grew to a record $718 billion in January.
A gradual easing of restrictions on the yuan and increasing trade with China have led some of Beijing’s partner countries include the renminbi in their official reserves and open currency swap agreements.
Last year, Taiwan’s central bank said it was holding the yuan in its foreign exchange reserves portfolio in recognition of the yuan’s growing globalisation and importance of trade, while Australia’s central bank unveiled a plan to invest some of its reserves in Chinese government bonds for the first time.
Among the Gulf Arab oil exporters, who mostly peg their currencies to the U.S. dollar, the United Arab Emirates signed a three-year currency swap agreement worth $5.5 billion with China in 2012 to boost two-way trade and investment.
Oil giant Saudi Arabia is the top crude supplier for China, the world’s second biggest economy. Last year, the Gulf monarchy supplied Beijing with around 1.17 million barrels per day of oil and is expected to deliver the same amount this year, according to traders.
Beijing has laid out plans to make the yuan convertible on the capital account, but its market interventions to hold back the pace of appreciation have shown a wariness of currency liberalisation.
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Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters
Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters.
BY MARWA RASHAD
RIYADH, March 16 Sun Mar 16, 2014 7:58am EDT
Asked whether it made sense to consider diversifying the central bank’s reserves to include the yuan, also known as the renminbi, or explore a currency swap agreement, Mubarak said: “We think it is a stronger currency, but it is far from being a reserve currency at this stage.”
“But indeed it represents a good option and a good diversifier and we have seen that some of the central banks have some reserves in the renminbi,” he said at an annual news conference in the Saudi capital.
Mubarak, who does not comment on policy outside of annual press briefings, did not say, however, whether the central bank had considered adding the yuan to its portfolio of net foreign assets. Its reserves, the vast majority of which are believed to be in U.S. dollars, grew to a record $718 billion in January.
A gradual easing of restrictions on the yuan and increasing trade with China have led some of Beijing’s partner countries include the renminbi in their official reserves and open currency swap agreements.
Last year, Taiwan’s central bank said it was holding the yuan in its foreign exchange reserves portfolio in recognition of the yuan’s growing globalisation and importance of trade, while Australia’s central bank unveiled a plan to invest some of its reserves in Chinese government bonds for the first time.
Among the Gulf Arab oil exporters, who mostly peg their currencies to the U.S. dollar, the United Arab Emirates signed a three-year currency swap agreement worth $5.5 billion with China in 2012 to boost two-way trade and investment.
Oil giant Saudi Arabia is the top crude supplier for China, the world’s second biggest economy. Last year, the Gulf monarchy supplied Beijing with around 1.17 million barrels per day of oil and is expected to deliver the same amount this year, according to traders.
Beijing has laid out plans to make the yuan convertible on the capital account, but its market interventions to hold back the pace of appreciation have shown a wariness of currency liberalisation.
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China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge
China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.
In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.
The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:
Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.
People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.
Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.
Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”
The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:
the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.
The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.
A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.
The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.
For some even the doubling in the rate band is not enough:
Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.
But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.
Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.
That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.
As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.
“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.
One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.
* * *
Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.
UBS
- The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
- Action doesn’t have direct implications for direction of CNY against USD
- UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
- Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang
Morgan Stanley
- “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
- Wider yuan band will help deter “carry trade speculators” as volatility increases
- Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
- Recent CNY depreciation created precondition for band widening
Commonwealth Bank of Australia
- With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
- Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
- Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years
BEA
- PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
- Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
- Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization
Bank of America
- Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
- PBOC wants to widen band when market view is more balanced
- Not very surprising in terms of band-widening timing
- Another band widening this year is unlikely
- Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
- Long-dated NDFs could weaken further, though not necessarily the daily official fixings
- Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation
ANZ
- With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
- Yuan band widening didn’t come as a surprise
- Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
- Another widening won’t come so soon given the last move was 2 yrs ago in 2012
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China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge
China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.
In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.
The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:
Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.
People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.
Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.
Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”
The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:
the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.
The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.
A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.
The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.
For some even the doubling in the rate band is not enough:
Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.
But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.
Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.
That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.
As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.
“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.
One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.
* * *
Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.
UBS
- The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
- Action doesn’t have direct implications for direction of CNY against USD
- UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
- Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang
Morgan Stanley
- “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
- Wider yuan band will help deter “carry trade speculators” as volatility increases
- Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
- Recent CNY depreciation created precondition for band widening
Commonwealth Bank of Australia
- With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
- Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
- Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years
BEA
- PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
- Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
- Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization
Bank of America
- Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
- PBOC wants to widen band when market view is more balanced
- Not very surprising in terms of band-widening timing
- Another band widening this year is unlikely
- Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
- Long-dated NDFs could weaken further, though not necessarily the daily official fixings
- Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation
ANZ
- With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
- Yuan band widening didn’t come as a surprise
- Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
- Another widening won’t come so soon given the last move was 2 yrs ago in 2012
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Death of the Dollar | Zero Hedge
Death of the Dollar | Zero Hedge.
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We’ve all done it, haven’t we? Chucked something in the wash and turned it on too high, only to see it pop out at the end of the cycle and it ends up the size of your hamster. Well, Obama has been doing the same. Except this time it’s not your winter woollies that he’s shrinking, it’s the greenback.
The US currency is shrinking as a percentage of world currency today according to the International Monetary Fund. It’s still in pole position for the moment, but business transactions are showing that companies around the world are today ready and willing to make the move to do business in other currencies.
The US Dollar has long been the world’s number one denomination in world currency supply. It represents 62% of total holdings in foreign exchange in central banks around the world. But, it is in for a tough race from up-and-coming strong currencies. The Japanese Yen and the Chinese Yuan are both giving the Americans a good run for their money. The Swiss franc is too (surprisingly). There is $6 trillion in foreign exchange holdings around the world at any given time, on average and the US Dollar represents almost two-thirds of that.
The fact that Brazil and China have also just signed a currency-swap deal worth something to the tune of $30 billion stands as living proof that the dollar may be further on the wane. China will exceed all expectations in the future as the world’s largest economy. The US will be overtaken. The Chinese currency will one day overtake the Dollar too. Has to be!
Although, it’s not quite there for the moment. China is not near being the world’s reserve currency yet. In order to be the world’s reserve currency there would be the need to produce enormous quantities of what the world wants. China has got that one off pat already. Then, countries holding the reserve currency would need to be able to spend that currency elsewhere in other countries or find a place to put it while waiting to do so. World capital markets are currently in dollars (40%), which means that there would be no possibility of using the Chinese currency. But, that’s only a matter of time. Some are predicting this will happen pretty soon.
The Federal Reserve has come in for some strong criticism over the unconventional Quantitative Easing methods that have resulted in 3 trillion spanking new dollars rolling off the printing presses. This has certainly brought about some degree of worry around the world that the dollar is not quite as safe as it might have been thought to be in the past. Is the world worrying that the dollar is not as safe a bet as it used to be in world domination. Are central banks worried that it will shrink in the wash and the colors will run?
Some are predicting that the dollar will shrink rapidly over the next two years and it will lose its top place as the world’s reserve currency by 2015. In the 1950s the dollar was 90% of total foreign currency holdings around the world. The dollar has definitely lost out to other currencies that are stronger. If there is a continued move and the dollar shrinks, then the resulting catastrophe that will ensue will have a spiral effect on the already enormous US budget deficit (over $1 trillion a year on average).
The only reason the Federal Reserve has been in a position to print more money recently is simply because they are in the strong position to be able to do so as the world’s leading reserve currency. If that changes, then the Americans won’t have the possibility of just hitting the button and setting the printing presses rolling. That means the US will be in no other position than to end up having to pay their debt back.
The US economy and the market are starting to show signs of recovery. Signs. It’s not sustained, hope as they might. If the dollar loses its attraction, then it won’t be used as the international reserve currency. Businesses will start using another currency and the dollar will lose out further still.
Some experts are saying that the problems of the dollar are like a time-bomb ready to explode. Ultimately, it will bring about the death of the dollar. As we stand on and watch, huddled around the coffin as it is lowered into the ground, we know it’s all too late. The flowers have been sent and the Stars and Stripes has been played in recognition of loyal service for the nation.
The QE methods are nothing more than aiding and abetting the already problematic situation of the greenback. We might look back in years to come and reminisce over whether it was the right (long-term) solution to use QE, whether printing bucks sent the greenback to an early grave, or whether it just reached the end of its life and croaked peacefully without making too much noise.
But, criticism of and worry over the dollar and its longevity have been hot topics for years now. The US dollar is a fiat currency that can easily lose status, deriving its value from government regulation and law. But, then again, so is the Euro. So, people living in Europe shouldn’t start throwing stones…they live in glass houses too…and that’s before they start.
Originally posted: Death of the Dollar
You might also enjoy: You’re Miserable USA! | Emerging Markets: Lock, Stock and Barrel | End of the Financial World 2014 | Kristallnacht on Wall Street? Bull! | China’s Credit Crunch | Working for the Few | USA:The Land of the Not-So-Free
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From PetroDollar to PetroYuan – The Coming Proxy Wars » Golem XIV – Thoughts
From PetroDollar to PetroYuan – The Coming Proxy Wars » Golem XIV – Thoughts.
Why would the central bank of Nigeria decide to sell dollars and buy Yuan?
At first glance it might not seem the most interesting or pressing question for you to consider. But I think it is one of those little loose threads that if pulled upon carefully begins to unravel the hints and traces of a much larger story. But please be warned this is speculative.
Two days ago the Nigerian Central Bank announced it was going to increase the share of its foreign currency reserves held in Yuan from 2% at present, to up to 7%. To do this it was going to sell US Dollars. Now a 5% swing in anything financial is big. In our debt drunk times it’s difficult somethimes to remember that 2.15 billion dollars (which is what 5% comes to) is actually a great deal of money, even if it is less than a drop in America’s multi trillion dollar debt ocean. On the other hand even a 5% increase in Yuan would still leave 80% of Nigeria’s $43 billion worth of reserves in dollars.
BUT while it is small in raw financial terms I think it is significant in geopolitical terms.
Nigeria is Africa’s second largest oil and gas exporter. It holds as many dollars as it does because oil is sold in dollars. Nigeria gets paid in dollars which it then needs to recycle. This is the famous petrodollar in action. It is also a major reason the dollar is still the world’s major reserve currency and that in turn is why America can have such a monumental pile of debt and still (for now) be the risk-off haven that institutional investors run to when other currencies and markets become too risky and unstable.
What interest me is that prior to this announcement from Nigeria’s central bank, China has, for some years now, been working hard and succesully to buy exploitation rights in Nigeria’s oil fields. In 2009 The Wall Street Journal reported,
Chinese companies have proposed investing $50 billion to buy 6 billion barrels of oil reserves in Nigeria, the African nation’s presidential adviser on energy said Tuesday.
A year later in 2010 the WSJ reported,
Nigeria and China have signed a tentative deal to build three oil refineries in the West African state at a cost of $23 billion, in a move to boost badly needed gasoline supply in Nigeria and to position China for more access to the country’s coveted high-quality oil reserves.
And just last year China extended a $1.1 billion loan in return for a reported agreement that oil exports to China would increase from around 20 000 barrels a day to 200 000 per day by 2015. This loan was on top of a range of development agreements betwen the two countries for various infrasctructure projects such a telecoms and railways.
Nigeria had, as of 2011, over 37 billion barrels of proven oil reserves. China is now one of its major trading partners. China wants Nigerian oil and my guess is that if it isn’t doing so already it is going to trade it entirely in Yuan. Such a move would mean Nigeria would need fewer dollars and more Yuan and the PetroYuan would begin to rise at the expense of the Petrodollar.
For some years now China has been making the Yuan a settlement currency. I have written about this a lot over the years. In 2012 I wrote a piece called “A new reserve currency to challenge the dollar – What’s really going on in the Straits of Hormuz.” China has created a series of bilateral settlement agreements with, among others, the EU, South Korea, Iran, India and Russia. All of these agreements by-pass the US dollar. If China now trades its oil in Yuan where will that leave the dollar? Of course Saudi would never agree to such a thing, would it?
Now Its a long way from Nigeria’s 200 000 barerels a day to overthrowing the dollar as the premiere oil currency. But let’s face it the US has gone to war on more than one occasion recently in part because the country involved had been going to sell its oil in Euros. And the US is Europe’s friend, isn’t it?
The US hawks have always been afflicted with dominophobia – fear of falling dominoes. Somewhere in a room in the Pentagon or Langley, there is a huddle of spooks, military types, oil men and State department advisors all wondering how to prevent this new creeping menace. Because you cannot afford to be complacent you know. It starts in one country and if you don’t do something other’s will follow and before you know it the rich Western Africa oil bonanza is flowing into Yuan, to be followed by all those North African and Middle Eastern Arab Spring countries where the clean-cut boys are already having to ‘advise’ on the need to take a firm line with potentially anti-American Muslim Brotherhood types by locking them up, shooting them and generally branding them as terrorists.
What would happen, someone will mention almost in a whisper, if Qatar were to triumph over Saudi and then cut a multi-lateral deal to sell its gas in Euros to Europe and in Yuan to China?
But to return from the overheated imaginations of the Virginia Hawks to some sort of reality, Nigeria is increasing its Yuan reserve at the expense of the dollar and is developing far closer ties to China than to the US. Which is why I think you will soon find the US dramatically increasing its involvement, both financial and military, in Angola.
Angola is going to be America’s answer to China’s Nigeria. And I think the signs are already there.
While in Nigeria Chinese companies are expanding, in Angola the big players are the Western Oil majors: Chevron/Texaco(US), Exxonmobil (US), BP (UK), ENI (Italy), Total (FR), Maersk (DK) and Statoil (NOR). There are others but these are the big players. Of these Total is probably the largest presence producing about a third of all Angola’s oil output. And Total has recently increased its presence. Of the others Chevron is one of the largest and is expanding aggressively.
Angola itself is busy selling off new concessions. 10 new blocks containing an estimated 7 billion barrels of oil, which is over half of all Angola’s proven reserves are to be auctioned this year. Angola has recently edged ahead of Nigeria to be Africa’s largest oil exporter. If I’m correct I expect the Western nations/companies, led by the US and new best war-buddy, France to make sure the Chinese do not get a large share of the spoils. One to watch.
As part of this new Western push, I expect to see China also restricted in any new oil fields around Sao Tome and Principe. The big players to date are Chervon, Exxonmobil and Nigeria. The latter suggesting a way in for the Chinese that I think the Westerners will want to push shut. To which end what I found interesting about recent events in Soa Tome and Principe is the visit there of Isabel dos Santos, the daughter of Angola’s President for life. I have written about her and her banking empire in The Eurofiscal Corruption Contest – The Portuguese entry. Isobel is most often refered to as Africa’s or Angola’s most famous business woman or Africa’s richest woman (She’s a billionaire). Rarely does anyone from the press raise the question of how she became so vastly wealthy.
She made a visit to the islands and both she and Angola’s state companies have begun to invest heavily. Angolan companies now have a very commanding position in the island’s economy and Angola, even though its own people live in poverty, found the money to loan Sao Tome and Principe $180 million which is half of the island’s GDP. Top that Beijing! The Islands are Portuguese speaking, the largest bank is Portuguese, and the islands also house a broadcast station for Voice of America.
I think taken together the signs are that the West, led by America, has in mind to try to contain or perhaps even confront Chinese expansion particularly as it concerns access to oil and gas in West and North Africa, and to rare earth minerals – but that’s another story. I don’t think there can be any doubt that America and Europe are looking at Chinese expansion and its hunger for resources and see a threat. The question is what will they do? America is accustomed to being the hegemonic power and its hawks have proved over and over that they are are quite prepared for military confrontation. The question for them would be how? Invading countries who have – in reality – very little military or economic might is one thing, but directly confronting another superpower is another. I think all sides would see direct and open military confrontation to be out of the question. Not just for military reasons but for global economic ones as well. They need to find ways of fighting that do not sink the world economy – neither its flows of goods and trade , nor its flows of captail and debt. Which is why I wonder about the possibility of seeing an era of new proxy wars being faught out in tit-for-tat destabilization escalating up to protracted gorilla/civil wars.
In West Africa the front line seems to run between Angola and Nigeria. So who would like to play a game of destabilize your neighbour? There is already unrest about Chinese goods flooding Nigeria. How tempting might it be to think about fanning flames of unrest in already unstable Nigeria espeicially in the delta?
In return what would you have to do to re-ignite the lines of mistrust and division which blighted Angola through decades of civil war? Dos Santos and the MPLA may have been the Soviet proxy but he’s a capitalist now. So, how about a nice cold-war style proxy war? I cannot bring myself to believe that no one at the Pentagon has dusted off the old plans for such conflict and set some analysts to working up some new ones with China scribbled in, in place of Russia.
Something is, I suspect, already afoot. One last pull on that little thread, one last detail that makes me wonder. Just last April (2013) the Israeli billionaire, Dan Gertler sold back to the government of the Democratic Republic of Congo, one of the oil companies/exploration blocks he had bought from it, but for 300% more than he paid. Anti-corruption campaigners have been up in arms.
Two facts interest me . One, that the purchase was actually financed by Sanangol, the Angolan state oil company (the company from which $32 billion had gone missing. Missing billions: billionaire dos Santos… No connection obviously). The DRC is to pay Sanangol back from oil revenue. Until that time, of course, Sanangol calls the tune. Two, that this oil block lies between the DRC and Angola in what was contested territory but has since been decreed a zone of cooperation.
Now this sale by Gertler could just be a bog standard pillage-Africa deal. And I might well be seeing things that just aren’t there, but why now? This sort of big money, that is connected to the top of the DRC government (how do you think Gertler was able to buy the concession at the price he did? And who do you think might be the, so far, hidden second beneficiary of Gertler’s oil company? The government minister who sold the concession to him in the first place, maybe?) moves when its contacts suggest this is a better time to lock in profit than times to come.
All in all, if I were a religious man, I would be saying a prayer for the children of Nigeria and Angola.
A note on all this speculation and non-financial stuff. I don’t usually write this much speculation but recently I have become more convinced that we are in a watershed in which everything around us, all the rules we are used to, all the lines on the map, are up for grabs and are changing around us. For me, finance is not separate from politics so we have to understand how they rub against one another. I hope you will bear with me.
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Is The China Bank Run Beginning? Farmers Co-Op Unable To Pay Depositors | Zero Hedge
Is The China Bank Run Beginning? Farmers Co-Op Unable To Pay Depositors | Zero Hedge.
While most of the attention in the Chinese shadow banking system is focused on the Credit Equals Gold #1 Trust’s default, as we first brought to investors’ attention here, and the PBOC has thrown nearly CNY 400 billion at the market in the last few days, there appears to be a bigger problem brewing. As China’s CNR reports, depositors in some of Yancheng City’s largest farmers’ co-operative mutual fund societies (“banks”) have been unable to withdraw “hundreds of millions” in deposits in the last few weeks. “Everyone wants to borrow and no one wants to save,” warned one ‘salesperson’, “and loan repayments are difficult to recover.” There is “no money” and the doors are locked.
The locked doors of one farmers’ co-op…
Shadow Banking has grown remarkably…
…in recent years, opened dozens of Yancheng local “farmers mutual funds Society”, these cooperatives approved the establishment by the competent local agriculture, and received by the local Civil Affairs Bureau issued a “certificate of registration of private non-enterprise units.”
As savers are promised big returns…
Deposit-taking and lending by cooperatives operated operation, and to promise savers, depositors after maturity deposits not only can get the interest, you can also get bonuses.
But recently things have turned around…
However, beginning in early 2013, Yancheng City Pavilion Lakes region continue to have a number of co-op money people to empty, many savers deposits can not be cashed, thus many people’s lives into a corner.
Dong-farmers in Salt Lake Pavilion mutual funds club, a duty officer’s office, told reporters, because many people take money, put out loans difficult to recover, leading to funding strand breaks.
Rough Google Translation:
Salesperson: …the money has been slowly falling and in the end is difficult to ask for money, right? And now there is no money coming in, now people don’t want to save money, and take all the money.
Reporter: But it’s their money, they should be able to…
Salesperson: I know I should [given them money]; however, when the turn started, their is no money, we get cut off and lenders and borrowers took off…
One depositor blames the government (for false promises):
The bank has a deposit-taking his staff, he would say that he is a government action that has the government’s official seal, to give you some interest, as well as the appropriate dividends, because we believe that the government, so we fully believe him , we put the money lost inside, who thought in November, Xi Chu who told us that something was wrong.
But don’t worry – this should all be settled by 2016…
Yu Long Zhang: we put all of his certificates of deposit are received out. You are only responsible for the loan out of the money back to the people against. The people’s money has been invested in other projects go, we have to be tracked to ensure no loss of capital assets, can dispose of his assets disposed of, can recover quickly come back.
Reporter: There is a specific timetable yet?
Yu Long Zhuang: 2014 cashing out the entire program.
Reporter: When did all of these things can be properly resolved?
Yu Long Zhuang: the latest is 2015, 2015, all settled.
So, for the Chinese, their bank deposits have suddenly become highly risky 2 year bonds…
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China Liquidity Fears Ease As PBOC Injects 255 Billion CNY – Most Since Feb 2013 | Zero Hedge
China Liquidity Fears Ease As PBOC Injects 255 Billion CNY – Most Since Feb 2013 | Zero Hedge.
Despite all the reform policy imperatives to constrict credit and normalize and liberalize policy and rates, the PBOC just provided the largest liquidity injection to its banking system in a year – 255bn CNY. While this is not entirely unusual for a year-end, when Chinese banks have to confess their illiquidity sins and cover mismatches (and are always helped by the PBOC); this year, short-term money-market rates are triple that of last year and there is a very real chance of a very real default within the shadow banking system. Of course, the sell-side are desperately writing cover that this is all priced in and even if the PBOC “lets some Trusts go” then they will come to the rescue and any crisis will be “contained.” However, no one knows who will be saved and therein lies the safety-first rub – now where have we heard “contained” before?
- *PBOC TO CONDUCT 75B YUAN OF 7-DAY REVERSE REPOS: TRADER
- *PBOC TO CONDUCT 180B YUAN OF 21-DAY REVERSE REPOS: TRADER
- *PBOC OFFERS 7-DAY REVERSE REPO AT 4.1% YIELD: TRADER
- *PBOC OFFERS 21-DAY REVERSE REPO AT 4.7% YIELD: TRADER
China Repo (lower) and Reverse Repo liquidity provision…(biggest liquidity provision in a year)
Crucially, the PBOC will have to withdraw this liquidty (obviously as the repo matures) if it is merely year-end window-dressing (as is obvious in the chart above with the large downward red bars in each Feb).
For now short-term repo rates are lower
1d: -85bps at 3.48%
7d: -135bps at 5.25%
14d: -34bps at 5.57%
But of course, the big banks always bid first and scoop up the supply – just as we saw yesterday – its the smaller banks that are the most in distress and 7-day repo went through a 8, 9, and 10% rates – these are triple those of the peak rates during last year’s new-year liquidty crunch.
And as much as banks will contend – just as the China itself admitted tonight:
Credit default risks with Chinese companies are emerging because of rising borrowing costs and tight liquidity conditions, said the official China Securities Journal in a front page editorial. The government needs policy flexibility to prevent any systematic financial risks.
This problem – described as “contained” by one sell-side shop reminds us of the “it could never happen here” mentality in the 2008 US shadown banking system. Critically, when the PBOC suggests it may let some banks go (to prove its mettle and resolve to fight out of control credut creation); investors will sell first and think later about which are safe and which are not. A ‘default’ – which looks increasingly likely – may just be the test of just how ‘planned’ and ‘controlled’ the Chinese banking system can really be…
We have on little question… for now the only Wealth Management Trust product that is publicly on the verge of default is CEQ#1 and that is only a 3 billion CNY position – so why did the PBOC feel the need to provide more than 80 times that amount of liquidity to the banking system unless it was epically worried about contagion and the total size of the Trust market.
Of course, the knne-jerk reaction is positive (well it is 255 Billion CNY of magic money) but between the BoJ starting its two-day meeting and John Hilsenrath confirming that Taper is here to stay – JPY weakness (and USD strength) are dragging stocks higher with S&P futures +7.5 from Friday’s close.
Fun-DURR-mentals?
Charts: Bloomberg
Olduvaiblog: Musings on the coming collapse 