China Nukes Yuan Shorts: PBOC Raises FX Fwd Reserve Requirement

In the clearest signal yet that the PBOC is drawing a "red line" to further currency devaluation, moments ago the PBOC announced it is raising the reserve requirement for FX forwards to 20%. 

As the PBOC notes, "due to factors such as trade frictions and changes in international exchange markets, there have been some signs of procyclical fluctuations in the foreign exchange market." As a result, the move is "aimed at preventing macro financial risks" with the central bank adding that it will "take counter cyclical measures to keep FX markets basically stable based on market conditions." The new forward foreign FX risk reserve requirement will become effective as of Aug. 6th.

Stated much simpler, what the PBOC is doing is nuking Yuan shorts and forcing a marketwide FX short squeeze.

Commenting on the move, Nomura's x-asset strategist Charlie McElligott said that when this action from the PBoC was previously enacted back in Oct ‘15, the market interpretation was that this shift was "…seen as an effort to restrict dollar purchases when the yuan is weakening."  So here we go again, “REVERSE ENGINES.”

Reuters is also reporting further “interventionary” commentary from the PBoC regarding willingness to take further “counter-cyclical” measures to stabilize FX markets.  

"In the even-larger macro-sense, this is unambiguously a relief trade for risk-assets via the powerful “weakening USD” impact it can have—ESPECIALLY Emerging Markets and Commodities, which have again recently traded VERY sloppy" according to McElligott, who adds that "we see S&P futures rallying powerfully, as “stronger USD” has been a pure “tightening” of financial conditions."

The Nomura strategist accurately concludes that "the PBoC just “eased” U.S. financial conditions."

And sure enough, as the Yuan slides, S&P futures are surging.

Full statement below (google translated):

The People's Bank of China decided to adjust the foreign exchange risk reserve ratio of the forward sales business to 20%.

Since the beginning of this year, the foreign exchange market has been operating steadily. The RMB exchange rate has been based on market supply and demand. There has been a rise in the market, the flexibility has been significantly enhanced, the market expectation has been basically stable, and cross-border capital flows and foreign exchange supply and demand have been generally balanced. Recently, due to factors such as trade frictions and changes in international exchange markets, there have been some signs of procyclical fluctuations in the foreign exchange market. In order to prevent macro financial risks, promote the stable operation of financial institutions, and strengthen macro-prudential management, the People's Bank of China decided to adjust the foreign exchange risk reserve ratio of forward sales from 0 to 20% from August 6, 2018. In the next step, the People's Bank of China will continue to strengthen the monitoring of the foreign exchange market. According to the development of the situation, it will take effective measures to carry out countercyclical adjustments, maintain the smooth operation of the foreign exchange market, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

Today's move is a mirror image of what the PBOC announced on September 8, 2017 when the Yuan tumbled after the PBOC cut its FX reserve requirement from 20% to 0%, sending the Yuan tumbling after the currency had hit its highest level in years. Back then, the offshore Yuan tumbled from 6.45 to below 6.51 in hours...

Obviously the reversal of this move would have just as dramatic a move in the opposite direction, and sure enough, after hitting a one year low of 6.91 against the dollar, the CNH has surged massively, rising as high as 6.825 before finding some support.

And yet, as some traders already noted, there will be a cost to China in terms of the impact of what is effectively policy tightening will have on domestic liquidity.  Specifically, as Citi notes, "the local economy and asset markets will struggle to cope with that and it is not a sustainable policy."

And while Trump may be content that for now, at least, the PBOC has finally drawn a real line in the sand for further devaluation, he will be double happy that China no longer will permit Yuan devaluation as a currency war response to rising tariffs, effectively handing Trump leverage in the trade war, if only for the time being.

Fonte: qui

Rickards Warns "Prepare For A Chinese Maxi-Devaluation"

The news is being dominated by breathless headlines about the new trade war between the U.S. and China. But this trade war has been brewing for years and came as no surprise to readers of my newsletter, Project Prophesy. In fact, the new trade war is simply a continuation of the currency wars that began in 2010.

I’ve warned for over a year that President Trump’s threats of tariffs should be taken seriously, while most of Wall Street discounted Trump’s talk as mere bluster. Now the trade wars are here as we expected, and they will get much worse before they are resolved.

Currency wars arise in a condition of too much debt and too little growth. Economic powers try to steal growth from their trading partners by devaluing their currencies to promote exports and import inflation.

But China can’t keep going with tariffs.

They only import about $150 billion of U.S. exports. At the rate they’re going, they’ll run out of goods to impose tariffs on. Trump can keep going because the U.S. imports so much more from China than they buy from us.

But the Chinese are obsessed with not losing face. Chinese President Xi has just been named in effect dictator for life. He doesn’t want to start out his new dictatorial regime by backing down from a stare-fest with Donald Trump. So he needs another option.

For China to keep fighting, they need an asymmetric response; they need to fight the trade war with something other than tariffs.

China holds over $1.2 trillion of U.S. Treasury securities. Some analysts say China can dump those Treasuries on world markets and drive up U.S. interest rates. This will also drive up mortgage rates, damage the U.S. housing market, and possibly drive the U.S. economy into a recession. Analysts call this China’s “nuclear option” when it comes to fighting a financial war with Trump.

There’s only one problem.

The nuclear option is a dud. If China did sell some of their Treasuries, they would hurt themselves because any increase in interest rates would reduce the market value of what they have left.

Also, there are plenty of buyers around if China became a seller. Those Treasuries would be bought up by U.S. banks, or even the Fed itself. If China pursued an extreme version of this Treasury dumping, the U.S. President could stop it with a single phone call to the Treasury.

That’s because the U.S. controls the digital ledger that records ownership of all Treasury securities. We could simply freeze the Chinese bond accounts in place and that would be the end of that. So, don’t worry when you hear about China dumping U.S. Treasuries. China is stuck with them. It has no nuclear option in the Treasury market.

But if you can’t win a trade war, you can try winning a currency war instead…

I just argued that China’s “nuclear option” in the trade wars is a dud. But, that does not mean China is out of bullets in a financial war. China cannot impose as many tariffs as Trump because they don’t buy as much from us as we buy from them.

China cannot dump Treasuries because there are plenty of buyers and the president could stop the dumping by freezing China’s accounts if things got out of hand in the Treasury market. But China could use a real nuclear option to counteract the trade war by fighting a currency war.

If Trump imposes 25% tariffs on Chinese goods, China could simply devalue their currency by 25%. That would make Chinese goods cheaper for U.S. buyers by the same amount as the tariff. The net effect on price would be unchanged and Americans could keep buying Chinese goods at the same price in dollars.

The impact of such a massive devaluation would not be limited to the trade war. A cheaper yuan exports deflation from China to the U.S. and makes it harder for the Fed to meet its inflation target.

Also, the last two times China tried to devalue its currency, August 2015 and December 2015, U.S. stock markets crashed by over 11% in a matter of a few weeks. So, if the trade war escalates as I expect, don’t worry about China dumping Treasuries or imposing tariffs.

Watch the currency. That’s where China will strike back. When they do, U.S. stock markets will be the first victims.

Maybe you think that’s unlikely because it would be such an extreme reaction by China. But you have to put yourself in the shoes of China’s leadership.

These aren’t academic issues to China’s leaders. They go to the heart of the government’s very legitimacy.

China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver. The overriding imperative of the Chinese leadership is to avoid societal unrest.

If China encounters a financial crisis, Xi could quickly lose what the Chinese call, “The Mandate of Heaven.” That’s a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years.

If The Mandate of Heaven is lost, a ruler can fall quickly.

Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused.

Chinese growth has been reported in recent years as 6.5–10% but is actually closer to 5% or lower once an adjustment is made for the waste. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.

What’s worse is that these white elephants are being financed with debt that can never be repaid. And no allowance has been made for the maintenance that will be needed to keep these white elephants in usable form if demand does rise in the future, which is doubtful.

Essentially, China is on the horns of a dilemma with no good way out. On the one hand, China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes.

The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.

The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) or inflation (which results in theft of purchasing power, similar to a tax increase).

Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.

China’s internal contradictions are catching up with it. China has to confront an insolvent banking system, a real estate bubble, and a $1 trillion wealth management product Ponzi scheme that is starting to fall apart.

A much weaker yuan would give China some policy space in terms of using its reserves to paper over some of these problems.

A maxi-devaluation of their currency is probably the best way to avoid the social unrest that terrifies China.

When that happens, possibly later this year in response to Trump’s trade war, the effects will not be confined to China. A shock yuan maxi-devaluation will be the shot heard round the world as it was in August and December 2015 (both times, U.S. stocks fell over 10% in a matter of weeks).

China doesn’t have a trade war nuclear option. But it does have one very powerful weapon. And it looks like it could be getting ready to use it.

Authored by James Rickards via The Daily Reckoning

China "Weaponizes Yuan" - Weakens Fix By Most Since 2016

On the heels of its 'stealthy' easing.. and not so stealthy:

zerohedge@zerohedge

In the past 48 hours China has:
- Cut its 7-day Treasury rate by 103bps
- Launched quasi QE
- told banks to flood the system with liquidity
- Sent the Yuan tumbling
- Warned more easing is coming

3:50 AM - Jul 20, 2018

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The PBOC just lowered the ax on the Yuan Fix - slashing their reference rate by the most since June 2016.

Offshore Yuan is tumbling to new cycle lows after the fix...CNH is down over 1250 pips this week - the biggest weekly devaluation since August 2015's plunge.

President Trump is gonna be pissed!!

Will China's chaotic capital markets ripple across the world?

Yen just snapped stronger...

The Indonesian Rupiah tumbled 0.5%, and gold is falling...

As we concluded previously, so how long before the trade war, which is already shifting to a currency war as a result of the recent record devaluation in the yuan, morphs into a central bank war and a renewed race to the bottom between the world's two most important economies? .. or worst still as Bannon suggested, a kinetic war.

Russia is an annoyance. China is our great challenge. Russia's economy is the size of Texas or New York State? It's got lots of nuclear weapons...but in today's warfare...nuclear weapons are taking a less important role. Trump is trying to end the Cold War and the Korean War...and all he is getting is grief from the globalists.

And that's a huge problem, because not only are we adversaries with China, we are at war with China, Bannon said.

We're in a war with China. Ray Dalio tweeted the other day. There's three types of war: information war, economic war, and guns-up kinetic war. They've been at war with us for 25 years. Many people in this room have exacerbated the rise of China."

Pushing back against the notion that Trump lacks grand foreign policy vision, Trump, like Reagan, is trying to build a foreign policy behind American assertiveness and optimism. Furthermore, the notion that China has advantages over the US in a trade war is laughable; the US can - and will - win, Bannon said.

If they devalue their currency they're just going to flood more dollars out. That's what their own people think about their economy. We allowed them to take the South China Sea. Donald Trump is not going to back off this. Donald Trump is not going to blink. Victory is when they give us access to their markets.

This trade war is going to end in victory and what you're going to see is a reorientation of the entire supply chain out of China.

But, we remind readers that 'hope' is not a strategy.

Fonte: qui

Mathematically Assured Disaster: The Debt And Our Delusions Are Out-Of-Control

“Gold prices rise along with debt. Expect much higher gold prices as the “debt bomb” detonates.” Here’s why…

Quick summary: U.S. debt, spending and deficits are out of control. Thinking otherwise is delusional. The “runaway train” of debt creation will end tragically. Protect your assets from a mathematically assured disaster while you can. Buy and hold silver, gold and platinum.

The national debt of western nations plus Japan is a travesty that threatens national insolvency, a crashing financial system, and social stability!

WHY?

Governments spend more than they extract from their citizens. They borrow the shortfall, a virtual mortgage on the earnings of future generations. This is bad policy, delusional and self-destructive.

From Thomas Jefferson:

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

From Herbert Hoover (President 1929 – 1933)

“Blessed are the young, for they shall inherit the national debt.”

Official U.S. government national debt (many other countries are no better) is the debt owed “on the books.” Unfunded liabilities, such as Social Security payments, Medicare, military pensions and upcoming student loan defaults are NOT included. The reality is far worse than indicated by the official national debt.

Plot 50 years of official national debt on a log scale. The trend is unmistakable. National debt has increased exponentially 8% – 9% per year. National debt doubles every eight to nine years.

Official national debt exceeds $21 trillion. Unfunded liabilities are $100 to $230 trillion, depending on who is counting.

BUT SURELY CONGRESS WILL ADDRESS THIS PROBLEM – RIGHT?

1. Name three reasons this 50 year exponential trend will reverse.
2. Name three congresspersons who want to reduce total spending.
3. Name three congresspersons who believe in a balanced budget.
4. Name one president who reduced spending or debt.
5. Name one “three-letter” agency volunteering to reduce their budget so the nation will be more fiscally responsible.
6. Name one defense contractor who wants to reduce their government contracts.

Give up? 0 for 12 is a strong sign that spending, debt, and deficits will increase until a reset occurs.

BUT SURELY OUR CONGRESS AND ADMINISTRATION ARE REDUCING THE DEFICITS EVEN IF THEY DON’T HAVE TOTAL DEBT UNDER CONTROL—RIGHT?

Well, no! The “debt ceiling” is a joke used for political purposes. Neither party wants to reduce spending or manage the nation’s resources.

Plot the deficits (national debt increases) year-by-year on a log scale. Some annual increases were larger than others due to wars, spending stimulus, extraordinary graft, and debt ceiling freezes, but the 50 year trend is clear—larger deficits. Since 1971 the exponential trend shows annual deficits increased on average per year.

(The reported “political deficit” includes only the items that congress wants to count.)

YES, THIS IS A PROBLEM. HOW DO WE FIX IT?

Doug Casey’s list follows. I discussed this topic here.

“In an ideal world there would be some radical changes. The best thing for the US in the (famous) long run is to go “cold turkey.” To abolish the Federal Reserve, fire its thousands of employees with their worthless PhDs. Return to 100% reserve banking with a strict separation of demand and time deposits. Depoliticize money by using gold, not Federal Reserve Notes. And default on the national debt, which is rewarding crony capitalists, and will turn future generations of Americans into serfs. And massively deregulate. And abolish the income tax, while cutting spending 90%. Etc. Etc.

The chances of that happening are exactly zero.”

Our financial system will not change until it collapses or resets, so we must adapt to its insanity.

It is a 5-D problem

• Debt has risen more than 8.5% per year, not counting unfunded liabilities. A 100+ year trend is unlikely to change.
• Deficits: The annual increase in the revenue shortfall has grown 14% per year since 1971, when President Nixon “closed the gold window” and let the dollar’s purchasing power collapse.
• Devaluation of the dollar occurs when the government and central bank create fiat dollars more rapidly than the economy grows. Have prices for steak, oatmeal, beer, cigarettes, new cars, prescription drugs, and political payoffs increased in the past 47 years? Yes, prices are far higher than when President Nixon separated the dollar from gold.
• Demographics: Baby boomers retire every day. Social Security payments and Medicare costs for them are skyrocketing. Expect larger budget deficits for many years.
• Difficult to correct:

1. Both Republicans and Democrats spend more money on pet projects and paybacks to donors.
2. The military wants more weapons systems.
3. Medicare costs are out of control and rising.
4. The U.S. government guarantees student loans. The national debt will increase as those loans default.
5. Congress passed a tax cut and spending increases which will boost the national debt.
6. The coming recession will lower tax revenues and increase other payouts.
7. Interest payments on $21 trillion of debt increase as rates rise.
8. The above will expand deficits and the national debt.
9. The U.S. government and the Federal Reserve have “painted themselves into a corner” with only difficult or next-to-impossible choices remaining, regardless of “happy talk.”

Politicians, presidents and central bankers will not admit they have mismanaged the government, devalued the dollar and created unpayable debt. Regardless, the problem is real, escalating every year and unsolvable. Few in government will discuss it.

In 1971 the price of gold was $42 per ounce. Today $1,330. The national debt in 1971 was $0.4 trillion. Today over $21 trillion. Examine this graph of national debt, the debt ceiling, and gold prices. Gold prices rise along with debt. Expect much higher gold prices as the “debt bomb” detonates.

CONCLUSIONS:

• Official national debt and annual deficits rise exponentially.
• There are few reasons to expect deficits to decline.
• There are many reasons to expect deficits to climb much higher.
• The dollar will devalue as debt and deficits rise.
• Gold and silver prices will rise as the dollar devalues. Their rally will spike higher as people realize the magnitude of the debt problem.

by Gary Christenson of Deviant Investor