China just dropped an absolute bombshell, entirely ignored by the mainstream media in the United States. The central bank of China has decided that it is “no longer in China’s favor to accumulate foreign-exchange reserves”. So in other words – China sees little need to continue “hoarding” USD as they have in the past ( in order to keep their own currency suppressed ) and is likely to stop purchasing U.S Debt as well.
As well China also announced last week ( again – completely ignored in mainstream media ) that they will soon look to price crude oil in Yuan on the Shanghai Futures Exchange, bypassing the need for exchange in USD.
The implications and ramifications are massive.
- China is now the number one importer of oil in the world, and will soon openly challenge use of the petrodollar.
- Dropping the purchases of U.S denominated debt leaves only the The Fed (as no one else in there right mind is buying U.S Treasuries ) so we can likely expect further downside in bond prices…and of course the dreaded inverse – rise in interest rates.
- When China starts dumping dollars and U.S denominated debt, it’s pretty safe to say the rest of the world will too.
- Allowing the Yuan to in turn “appreciate in value” will make all those wonderfully cheap products sold in The United States much more expensive.
In all….this is likely the largest , most significant story / issue now facing the U.S as China’s “backstop” to the U.S Dollar and never-ending purchases of U.S Debt “until now” have been primary drivers in supporting “whatever it is you call this” economic recovery.
Pulling the rug on U.S Dollar and debt purchases is without a doubt the move that “takes the queen”.
Checkmate next.
Hey Kong,
Thanks a lot for this blog. Your perspective is very validating. I noticed Dr. Paul Craig Roberts mentioned this agreement too. (I read him vigorously since you recommended back in October).
There was also a really interesting op-ed in The Moscow Times yesterday. An opposition MP wrote it, saying “The U.S. national debt, now at more than $17 trillion, cannot keep rising indefinitely. We think that Russia must raise the portion of its reserves held in gold and reduce its dollar reserves. We believe that a currency from one of the BRICS countries can become a reliable alternative world reserve currency,”
Read more: http://www.themoscowtimes.com/opinion/article/the-dirty-and-dying-dollar/490000.html#ixzz2lfUt8bSp
Crazy stuff, right? And everybody is talking about it except the North American media. The only conflicting thought I sometimes have is…
How do we have any real faith in the Chinese economy? Manipulated data being put out by the US does not preclude China from doing the same, does it? Plus, there are some serious demographic headwinds, massive societal inequality (keeping their security apparatus distracted) and some geographic factors that make China future as a global power a little more blurry. Well…
Whatever the answer it sure is fun to think about and try to profit from 🙂
Thanks again for providing such a great place for this meaningful discussion!
J
The Chinese don’t want to become the world’s reserve currency, as this responsiblity ( as well the opening of capital accounts etc…) is not of particular interest to the Chinese so….moving towards a “more convertable” Yuan is the move at hand – I don’t think “global domination” is really the objective.
The bottom line is “moving away from USD” is now more than a given and the ramifications are huge. Who can possibly fill the void with respect to the future purchase of U.S Debt? As well the implications of the Chinese just “letting the dollar fall” – wow.
As far as “faith in the Chinese economy” goes…all I can really say/do is consider that China is a massive “engine of growth” moving forward, even with lower estimates of future GDP – and go with that.
The inequality currently sweeping across the U.S is unprecedented, while millions of Chinese are experiencing prosperity for the first time in history, and with future “reforms” moving in the right direction.
I’m curious ….what are you thinking with respect to “geographic factors”?
Thanks for your response Kong. I’m still new to the currency stuff so my apologies when I have trouble perceiving the shades of grey. At the end of day I definitely hear what you are saying about “moving away from USD” and the enormous implications.
My thoughts on geography (pretty much summed up by the “China as an island” argument) are more or less a moot point if China isn’t concerned with power projection on any kind of global scale. And the more I reflect on the writing and comments here, the more I realize it might make sense that they’re not!
Very Interesting article.. Thanks, your blog is defiantly a great source of information…
If you dont mind, can I ask you which base currency do you keep your trading accounts
Kong! very thought provoking post! i also read somewhere that the proceedings of the Chinese plenum included 1) possibly allowing non government orgs to develop to handle social needs and 2) legal system reforms to curb political corrruption. the US needs to stop relying on money printing and start putting meaningful fiscal reform in place or the rest of the world is going to clean our clock
If they stop hoarding reserves, all that means is that they intend to narrow the trade surplus by increasing imports (and therefore domestic investment) or facilitating capital flight (foreign investment). Perhaps they finally realize how expensive it will be to clean up their own bubble. The euro is the only currency with any hopes of replacing the dollar right now.
Exactly….I don’t expect a “replacement” short of the IMF’s “SDR’s” possibly serving as some alternative should “the shit really hit the fan”.
As the EUR is the second most widely held reserve, it will obviously be a gainer as USD continues lower – but considering the intrinsic problems with the EU Zone in general ( with 17 independent countries sharing a single currency ) it certainly won’t take the top spot.
Great post, Kong. Was expecting to see this sort of thing happening but certainly not this fast. Thanks for the post. Really useful.
And even at that…..I’m pretty sure it will happen “slower” than we’d necessarily like as traders.
But cleary the writing is on the wall.
Ya sadly trading these changes is an entirely different ball of wax.
Equity mkts are stuck….yen still being suppressed down
Am I correct–stopping buying more USD is NOT the same as selling what they have. I wonder if this is a coordinated policy with the FED to import inflation, since the idiots think that’s a great idea…
Its not policy yet. one of their heads said it in a meeting. Its not a bomb shell . ITs not policy yet or next month. As Jim Rickards points out , ” to make a policy one has to have the desire and capability ” . How could they do that at this point? Rickards also points out 10 years might be possible.
Yes I apologize for the “sensationalism” as this “is” the Internet….
Hard enough getting people to “read at all” about these kinds of things let alone talking about it.
The implicatations are considerable if only with respect to the purchase of debt “lessening”.
Who’s stepping in? Who’s filling the void?