The People’s Bank of China is reported by Bloomberg to have said that it will rein in dollar purchases as the country no longer benefits from increases in its foreign-currency holdings…What implications will this have? I believe that we’ll see the start of a U.S. dollar collapse.
So reports Katchum (katchum.blogspot.ca) in edited excerpts from his post* entitled People’s Bank of China Stops Supporting U.S. Debt.
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here). The excerpts may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Katchum goes on to say in further edited excerpts:
Over the years the Chinese central bank has increased its balance sheet to $3.66 trillion of which $1.3 trillion are U.S. treasuries as illustrated by Chart 1 below. This is almost half of the PBOC’s balance sheet.
|Chart 1: PBOC Balance Sheet|
Other assets include U.S. agencies, U.S. corporate debt, U.S. equities and other non-U.S. assets (Chart 2).
|Chart 2: PBOC’s U.S. Asset Composition|
If the PBOC is going to stop the purchases of foreign currency reserves, this means that they will stop buying the assets above and mainly stop buying U.S. treasuries. That’s what it all comes down to. This also means that their excess of U.S. dollars will need to be converted to other assets like the yuan, or even gold.
China is preparing the yuan to become a reserve currency and I believe this is a first step in that direction. We know that China has amassed a lot of gold, when considering the amount of gold imports from Hong Kong. I believe the PBOC should have added significantly to its gold positions since 2009. The PBOC hasn’t reported their gold holdings since 2009 but it is said that they own around 4000 tonnes of gold right now. Needless to say this will be very bullish for the yuan going forward. If we take a look at the chart of the USD/CNY exchange rate we see that the yuan has already increased a lot. I believe the yuan will continue its ascend. To bank on this trend, investors can buy the WisdomTree Dreyfus Chinese Yuan Fd ETF (CYB).
|Chart 3: USD/CNY|
People are still wondering: “If the Chinese stop supporting the U.S. treasuries, why has the U.S. dollar strengthened so much?”. Well, in reality the Chinese have bought many treasuries in the past (Chart 4), but are only now showing their plans to start the unwinding process.
|Chart 4: China U.S. Treasury Holdings|
We can already see this “unwinding” in the U.S. bond market as U.S. treasury yields are starting to move up (Chart 5).
|Chart 5: U.S. Treasury Yields|
As you know, the Chinese own mostly longer dated U.S. treasuries. They will do everything to shorten their maturity and sell the longer dated treasuries. The reason why they do this is that shorter maturities have less price risk. Longer maturities are more volatile and the losses would be greater during a U.S. bond market collapse. While this conversion happens, the U.S. government is eagerly buying up these longer dated treasuries and helping the Chinese to unload. I can’t blame the Chinese for doing this.
If you look how the Western central banks are increasing their balance sheets (Chart 6) and increasing their debt piles, U.S. treasuries are not a good investment going forward. I believe Quantitative Easing (QE) is never going to end because the unemployment picture is very bad at the moment. We hear from the New York Post that the unemployment rate numbers have been falsified by the U.S. government, so that’s even more incentive to have QE to infinity.
|Chart 6: Central Bank Balance Sheet Expansion|
The inflationary prospects are going to start arising in the near future because there are many signs appearing.
- First off, we see that art prices, real estate and equities have rising considerably. When all of these capital goods start flowing their earnings into the consumer market, we will start to see consumer inflation.
- Second, we have seen the capacity utilization rate for the U.S. total industry rise to new highs, this is a sign that inflation is about to arise in the coming years.
- Third, we see that the average hourly earnings have bottomed out and this will translate into a higher price structure in the economy.
- Finally, the money supply has continued to rise and eventually all of this extra money will have inflationary effects.
I believe the Chinese will diversify from their U.S. treasury holdings soon and will buy other depreciated assets. One of these depreciated assets is of course gold and silver. With these assets going under the cost of production right now, there is no reason not to buy these.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
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