China’s Final Act Before the Global Financial Reset

The Cabalist bankers’ manipulation to keep the fiat system afloat by artificially driving gold prices down boomeranged when China unloaded its massive dollar reserves to buy as much cheaper gold as possible.

Right now, even ignoring the existence of the Collateral Accounts, China has more than enough firepower to effect the long sought global financial system reset that will arrest the West’s control on global finance in favor of a more equitable distribution of economic power through the BRICS and allied Eurasian groups.

But most important of all is the effective suppression of endless wars of “exceptionalist” aggression now starting with the recently concluded Iran Nuclear Deal, and the sudden turn around and ongoing participation of Turkey on the fight against ISIL.

The Cabalists’ fantasy world continues to shrink and crumbles, and the Fiat Financial Crash is already in its advanced stage…

China’s Record Dumping Of US Treasuries Leaves Goldman Speechless

Tyler Durden's picture

On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.

We then put China’s change in FX reserves alongside the total Treasury holdings of China and its “anonymous” offshore Treasury dealer Euroclear (aka “Belgium”) as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted – namely virtually the entire delta in Chinese FX reserves come via China’s US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.

We explained all of these on Friday in “China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium“, and frankly we have been surprised that this extremely important topic has not gotten broader attention.

Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China’s dramatic reserve liquidation

Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.

JPM conclusion is actually quite stunning:

This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).

Incidentally, $520 billion is roughly triple what implied Treasury sales would suggest as China’s capital outflow, meaning that China is also liquidating some other USD-denominated asset(s) at a feverish pace. So far we do not know which, but the chart above and the magnitude of the Chinese capital outflow is certainly the biggest story surrounding the world’s most populous nation: what is happening in its stock market is just a diversion.

At this point JPM goes into a tangent explaining what the practical implications of a massive capital outflow from China are for the global economy. Regular readers, especially those who have read our previous piece on the collapse in the Petrodollar, the plunge in EM capital inflows, and their impact on capital markets and global economies can skip this part. Those for whom the interplay of capital flows and the global economy are new, are urged to read the following:

One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. Reuters data on trade finance only aggregates loan syndication deals, which have mandated lead arrangers and thus capture the trends in the large-scale trade lending business, rather than providing an all-inclusive loans database. Perhaps the largest source of regularly collected and methodologically consistent data on trade finance is credit insurers (see “Testing the Trade Credit and Trade Link: Evidence from Data on Export Credit Insurance”, Auboin and Engemann, 2013). The Berne Union, the international trade association for credit and investment insurers with 79 members, includes the world’s largest private credit insurers and public export credit agencies. The volume of trade credit insured by members of the Berne Union covered more than 10% of international trade in 2012. The Berne Union provides data on insured trade credit, for both short-term (ST) and medium- and long-term transactions (MLT). Short-term trade credit insurance accounts for the vast majority at around 90% of new business in line with IMF estimates that the vast majority 80%-90% of trade credit is short term.

Figure 4 shows both the Reuters (quarterly) and the Berne Union (annual) data on trade finance loan syndication and trade credit insurance volumes, respectively. The quarterly Reuters data showed a clear deceleration this year from the very high levels seen at the end of last year. Looking at the first two quarters of the year, Reuters volumes were down by 25% vs. the 2014 average (Figure 4). The more comprehensive Berne Union annual volumes are only available annually and the last observation is for 2014. These data showed a very benign trade finance picture up until the end of 2014. Trade finance volumes had been trending up since 2010 at an annual pace of 8.8% per annum (between 2010 and 2014) which is faster than global nominal GDP growth of 6% per annum, i.e. the trend in trade finance had been rather healthy up until 2014, but there are indications of material slowing this year. This is also reflected in world trade volumes which have also decelerated this year vs. strong growth in previous years (Figure 5).

Summarizing the above as simply as possible: for all those confounded by why not only the US, but the global economy, hit another brick wall in Q1 the answer was neither snow, nor the West Coast strike, nor some other, arbitrary, goal-seeked excuse, but China, and specifically over half a trillion in still largely unexplained Chinese capital outflows.

* * *

But wait, because it wasn’t just JPM whose attention perked up over the weekend. This morning Goldman Sachs itself had a note titled “the Curious Case of China’s Capital Outflows“:

China’s balance of payments has been undergoing important changes in recent quarters. The trade surplus has grown far above previous norms, running around $260bn in the first half of this year, compared with about $100bn during the same period last year and roughly $75bn on average during the previous seven years. Ordinarily, these kinds of numbers would see very rapid reserve accumulation, but this is not the case. Partly that is because China’s services balance has swung into meaningful deficit, so that the current account is quite a bit lower than the headline numbers from trade in goods would suggest. But the more important reason is that capital outflows have become very sizeable and now eclipse anything seen in the recent past.

Headline FX reserves in the second quarter fell $36bn, from $3,730bn at end-March to $3,694bn at end-June. While we estimate that there was a large negative valuation effect in Q1 (due to the drop in EUR/$ on the ECB’s QE announcement), there was likely a positive valuation effect in Q2, which we put around $48bn. That means that our proxy for reserve accumulation in the second quarter is around -$85bn, i.e. the actual “flow” drop in reserves was bigger than the headline numbers suggest because of a flattering valuation effect. If we put that number together with the trade surplus in Q2 of $140bn, net capital outflows could be around -$224bn in the quarter, meaningfully up from the first quarter. There are caveats to this calculation, of course. There is obviously the services deficit that we mention above, which will tend to make this estimate less dramatic. It is also possible that our estimate for valuation effects is wrong. Indeed, there is some indication that valuation-related losses in Q1 were not nearly as large as implied by our calculations. But even if we adjust for these factors, net capital outflows might conceivably have run around -$200bn, an acceleration from Q1 and beyond anything seen historically.

Granted, this is smaller than JPM’s $520 billion number but this also captures a far shorter time period. Annualizing a $224 billion outflow in one quarter would lead to a unprecedented $1 trillion capital outflow out of China for the year. Needless to say, a capital exodus of that pace and magnitude would suggest that something is very, very wrong with not only China’s economy, but its capital markets, and last but not least, its capital controls, which prohibit any substantial outbound capital flight (at least for ordinary people, the Politburo is clearly exempt from the regulations for the “common folk”).

Back to Goldman:

The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.

In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.

But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China’s Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman… and this website of course.

Finally, if China’s selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

Or let us paraphrase: how soon until QE 4?

Russell Napier: What Happens When Markets Realize China Is A Forced Seller Of Treasuries

Tyler Durden's picture

One week ago, our post “China’s Record Dumping Of US Treasuries Leaves Goldman Speechless” which revealed an unexpected plunge in China’s foreign exchange reserves or, said otherwise, a historic sale of US Treasurys held by official and unofficial Chinese accounts, was met with unprecedented public interest, having been read over 400,000 times (a record for coverage of a nuanced, technical subject) and even forced Goldman to follow up admitting its “estimation” of Chinese reserve outflows may have been too high.

By then the cat was out of the bag, and now what is surely the biggest Chinese wildcard, not what happens to itts manipulated stock market, just how much more capital outflows will Beijing suffer before it is forced to finally end the Renminbi’s peg with the dollar, is finally being appreciated by the general public.

Which leads us to today’s most recent article by ERI-C’s Russell Napier titled “The Great Reset – Act II“, in which the former CLSA strategist, asks a simple question:

how US Treasury bulls in the private sector would react if they knew in advance that the second largest owner of Treasuries, the PBOC, was a forced seller of Treasuries. Such compelled selling would be obvious before US markets opened each morning as downward pressure on the RMB exchange rate in Asia forced the PBOC to liquidate foreign currency assets to defend the fixed exchange rate. Would even Treasury bulls stand in the way of such a large and predictable liquidation? If they didn’t then the second phase of The Great Reset would come to pass and the decline of EM external deficits would force tighter monetary policy in both EM and DM.”

For his answer, read on. Courtesy of The Electronic Research Interchange

* * *

The Great Reset – Act II

Do you love me, or are you just extending goodwill?
Do you need me half as bad as you say, or are you just feeling guilt?
I’ve been burned before and I know the score
So you won’t hear me complain
Will I be able to count on you
Or is your love in vain?

– Bob Dylan – Is Your Love in Vain? (1978)

In May 2011 this analyst changed his mind about the impact of the monetary love being spread around the world by developed world central bankers. He stopped forecasting higher inflation and instead foresaw the return of deflation.

Fresh from the battering in the deflationary storm of 2007-2009 investors did not want to hear that such monetary love would be in vain. They counted on central bankers then, just as they are counting on them now, to restore a level of nominal GDP growth that can prevent the severe burning of another painful deleveraging through default.

Central bankers, the argument goes, need to boost financial asset prices to achieve higher nominal growth and that higher growth, when finally achieved, will be good for asset prices anyway. So while their love may be for higher nominal GDP growth, the goodwill this spreads to asset prices should be priced in if it succeeds in creating inflation. However, a list of some prices that have been falling from last year — gold, steel, iron ore, copper, crude, coffee, cocoa, live cattle, hogs, orange juice, wheat, sugar, cotton, natural gas, silver, platinum, palladium, aluminium and tin — must raise questions as to whether there is reflation or whether this monetary love is in vain.

This analyst is told that such major decline in prices across a broad spectrum of commodities and products represents a supply shock and not the failure of central banks to spur demand! Such supply side synchronicity is highly unlikely. This is nothing less than a failure to reflate and it is due to the growing crisis in Emerging Markets (EM).

It was in a report called The Great Reset, in May 2011, that this analyst suggested the world was more likely to move towards deflation rather than higher inflation. There were many reasons for this change of mind, but key to it was a realisation that EM external surpluses had peaked.

That sounds like a rather esoteric reason to change from an inflationist to deflationist stance, and it was not one that was of any concern to investors. However, the end of a long period (1998-2011) when external surpluses, combined with exchange-rate intervention policies, forced EM to create more domestic high-powered money, while simultaneously depressing the yields on US Treasuries, seemed both important and deflationary. Crucially, The Great Reset predicted this decline in EM external surpluses would produce tighter monetary policy in both EM and the developed world despite the efforts of central bankers to prevent it.

This was not a dynamic that would inflate away the world’s record high debt-to-GDP ratio! This was a monetary mechanism, in the shape of EM exchange-rate targets, that would counteract the expansionary monetary policy of the developed world’s central bankers and thus would be bad news for global growth assets. This focus on the peaking in EM external surpluses and the impact on growth assets proved to be both a good and a bad forecast and remains essential to understanding the failure of monetary love to boost global nominal GDP growth.

As it happened, most EM foreign exchange reserves peaked in 2011, as did EM equities, EM currencies, commodities and the price of gold. Inflation rates in the developed world also peaked in 2011, with the US , the UK and the Euro area all since reporting deflation. So far so good for the May 2011 forecast with even European equities experiencing a slump in 2011 and not surpassing their early 2011 level until the end of 2014.

Crucially though, The Great Reset was very wrong about the US. US equities simply ignored the travails of Europe, EM and commodity markets and sailed ever higher. Ask any fund manager why developed-world equities ignored the deflationary trends since 2011 and they will point to the monetary love spread by The Federal Reserve, The Bank of Japan, The Bank of England and The European Central Bank. But fixating on the expansion of these central bank balance sheets has only distracted investors from the monetary tightening that started in 2011 and is now accelerating in EM as forecast in The Great Reset.

Most investors still believe that we live in a fiat currency world. They believe central bankers can create as much money as they believe to be necessary. Such truths are on the front page of every newspaper, but they may contain just as much truth as the headlines of their tabloid cousins. A belief in this ability to create money is the biggest mistake in analysis ever identified by this analyst.

The first reality it ignores is that money, the stuff that buys things and assets, is created by an expansion of commercial bank, and not central bank, balance sheets. The massively expanded central bank balance sheets have not lifted the growth in broad money in the developed world above tepid levels. Until that happens, developed world monetary policy must be regarded as tight and not easy.

The second reality that a belief in a fiat currency world refuses to recognise is the fact that the growth-engine of the world, the EMs, do not operate independent monetary policies. EMs have chosen to target the value of their exchange rates , primarily to the USD and the EUR, and thus abandon their ability to create money when they chose to. The scale of their money creation is dictated to them by the size of their external surplus. This is important to grasp when even a cursory look at changes in foreign-exchange reserves reveals that most EMs are constantly meddling to affect exchange rate targets and thus, abandoning any control they held over their own domestic money supply.

This is why The Solid Ground considered the end of the rise in EM foreign exchange reserves to be so key in shifting the outlook towards deflation and not inflation. The lack of reserve accumulation would either force deflation upon EMs or force them to devalue. The impact of either adjustment, whether through lower growth or lowered USD selling prices, would be deflationary and not inflationary.

Given the huge role China has played since its 1994 devaluation in spurring global growth, the adjustment process in China could be particularly detrimental to the stability of global prices. Events of the past few weeks are finally focusing investors’ attention on the lack of monetary control in China and thus on the lack of control generally. Local owners of RMB denominated capital have been voting with their feet since 2012 and capital has been pouring out of the country. Now even foreigners are realizing that an external deficit, and a fixed exchange rate, do not lead to more money, reflation or any form of control over asset prices by the authorities.

The Chinese authorities have attempted to shore up their external accounts by getting their commercial banks to borrow USD to fund RMB activities, ramping the domestic stock market, suggesting the opening of the domestic debt market to foreigners, lobbying for RMB inclusion in the SDR and hoping for inclusion in the MSCI equity indices. At this stage they are failing and the continued contraction in China’s foreign exchange reserves is witness to a continued external deficit.

The Great Reset , which began with China’s first reported foreign reserve decline in 2012, is now accelerating. The ultimate destination for China is either to continue to support the exchange rate and accept ever lower growth, probably accompanied by deflation, or to devalue. Either option will further exacerbate global deflationary pressures and place huge pressure on other EMs that compete with China and are linked to the USD.

So could the liquidation of US Treasuries by EMs, in an effort to defend their exchange rates, also push up Treasury yields? This was the forecast in the May 2011 paper and it was very wrong. It was wrong because the Fed was an aggressive buyer of Treasuries, but the Fed is not currently in the marketplace.

Today the yield on Treasuries is set by the actions of foreign central bank activity and the global private sector. The Solid Ground has long wondered how US Treasury bulls in the private sector would react if they knew in advance that the second largest owner of Treasuries, the PBOC, was a forced seller of Treasuries. Such compelled selling would be obvious before US markets opened each morning as downward pressure on the RMB exchange rate in Asia forced the PBOC to liquidate foreign currency assets to defend the fixed exchange rate. Would even Treasury bulls stand in the way of such a large and predictable liquidation? If they didn’t then the second phase of The Great Reset would come to pass and the decline of EM external deficits would force tighter monetary policy in both EM and DM.

PBOC liquidation of Treasuries to support the RMB exchange rate would not be prolonged. Both the US and China would recognize the dreadful dynamics inherent in such a policy if it did indeed push Treasury yields higher. Very soon China would be given the permission to devalue its exchange rate and the nature of the pain to be endured by the global system would be of a somewhat lesser and somewhat different nature. It would, however, still be a deflationary adjustment.

One day we will tell those much younger than ourselves that once upon a time there was a large economy that ran a surplus on both its current account and on its capital account for more than twenty consecutive years. We will tell them, when they’re sitting comfortably, that because it went on for twenty years everyone assumed it would go on forever, despite the fact that such a thing had never ever been seen before. Then one day it ended. And the world thought that this would pass or, if it didn’t pass, they thought that it was not of great import.

Only years later did the world realise that the end of unsustainable double surpluses in China triggered what became known as The Great Reset. It all began with the sudden realisation that developed-world central bankers had no magic wand with which to reflate the world if China was forced to deflate or devalue. The first sign that the monetary love of developed world central bankers would ultimately be in vain was the collapse of commodity prices in 2015. What came next did not involve the words ‘happily’ ‘ ever’ and ‘after’.


That’s the fiat financial system crashing as we were expecting since 2008. Yet. even at this eleventh hour some of these financial experts are still grappling for answers as to what China is actually doing.

On the other hand, those who have seen the writing on the wall are expecting that something big is about to happen…

As the size of the markets’ bubbles has already reached historical proportions and every further cash injection only brings them closer to the point of bursting, one does not exaggerate by stating that we are now in the final stages of a development that will change the face of the world.

– Ernst Wolf

We are privileged to have understood these covert geopolitical events from the very beginning.

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9 thoughts on “China’s Final Act Before the Global Financial Reset”

  1. It looks like there´s Roths agentur almost everywhere,or in any place where there´s a big enough capital system.In they claiming there´s two NWO being builded up,one in the west and the other in the east.I still do not know what to believe,just keep reading and get some clues from the headlines.

  2. While the first report suggests China is selling US Treasury Bills to buy gold, a wise move I would think, especially if the Mandarins have forecast further collapse of the $ and rise in the universal value of gold, all of which is good news for those of us who see America as a poodle of the war-mongers and China as a force for equality, equilibrium and peace (China has not invaded any nation in the last 100 years whereas the US has attacked 35 countries since WW2). But the worry is, who have they bought the gold from? Could it be the Rothschilds now have a new wealth in Yuan with which to manipulate the Chinese economy as they have done with other economies with so much success for their own strategies which, as seen in the Middle East, involve war, mass extermination, chaos, subsequent control of governments and resources?

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