China Has Dumped $100 Billion In Treasurys In The Past Two Weeks

 

On August 11, China devalued its currency, and in the subsequent 3 days the onshore Yuan, the CNY, tumbled by some 4% against the dollar. Then, as if by magic, the CNY stabilized when China started intervening massively, only this time not through the fixing, but in the actual FX market. 

This means that while China has previously been dumping reserves as a matter of FX policy, after August 11 it was intervening directly in the FX market, with the intervention said to really pick up after the FOMC Minutes on August 19, the same day the market finally topped out, and has tumbled into a correction since then. The result was the same: massive FX reserve liquidations to defend the currency one way or the other.

And yet something curious emerges when comparing the traditionally tight, and inverse, relationship between the S&P and the Treausry long-end: the drop in yields has not been anywhere near as profound as the tumble in stocks. In fact, the 30 Year is wider now than where it was the day China announced the Yuan devaluation. 

Why is that? 

We hinted at the answer on two occasions earlier (here and here) and yet the point is so critical, and was missed by virtually all readers, that it deserves to be repeated once again: as part of China's devaluation and subsequent attempts to contain said devaluation, it has been purging foreign reserves at an epic pace. Said otherwise, China has sold an epic amount of Treasurys in the past two weeks. 

How epic? We turn it over to SocGen once again:

The PBoC cut the RRR for all banks by 50bp and offered additional reductions for leasing companies (300bp) and rural banks (50bp). All these will take effect as of 6 September, and the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today's onshore exchange rate.  In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August. 

There you have it: in the past two weeks alone China has sold a gargantuan $106 (or more) billion in US paper just as a result of the change in the currency regime!

But wait, there's more: recall that one months ago we posted that "China's Record Dumping Of US Treasuries Leaves Goldman Speechless" in which we reported that China has sold some $107 billion in Treasurys since the start of 2015. 

When we did that article, we too were quite shocked at that number. However, we - just like Goldman - are absolutely speechless to find out that China has sold as much in Treasurys in the past 2 weeks, over $100 billion, as it has sold in the entire first half of the year!

In retrospect, it is absolutely amazing that the 10 and 30 Year Bonds have cratered considering the amount of concentrated selling by China. 

But the bigger question is how much more does China have left to sell, if this pace of outflows continues. Here is SocGen again:

From an operational perspective, China's FX reserves are estimated to be two-thirds made up of relatively liquid assets. According to TIC data, China held $1,271bn US treasuries end-June 2015, but treasury bills and notes accounted for only $3.1bn.The currency composition is said to be similar to the IMF's COFER data: 2/3 USD, 1/5 EUR and 5% each of GBP and JPY. Given that EUR and JPY depreciation contributed the most to the RMB's NEER appreciation in the past year, it is plausible that 

the PBoC may not limit its intervention to selling only USD-denominated assets.

* * * 

China's FX reserves are still 134% of the recommended level, or in other words, around $900bn (1/4 of total) and can be used for currency intervention without severely impacting China's external position.

Should the current pace of liquidity outflows continue, and require the dumping of $100 billion in FX reserves, read US Treasurys, every two weeks this means China has, oh, call it some 18 weeks of intervention left. 

What happens when China liquidates all of its Treasury holdings is anyone's guess, and an even better question is will anyone else decide to join China as its sells US Treasurys at a never before seen pace, and best of all: will the Fed just sit there and watch as the biggest offshore holder of US Treasurys liquidates its entire inventory...

China Devalues Yuan To Fresh 4-Year Lows, Arrests Top Securities Firm Exec As Stocks Slide Despite Rate Cuts

Confusion reigns at Bloomberg also... (look at URL - original title, and compared to title posted at 8pmET)...

And now...

h/t Beermunk

As we detailed earlier:

The Asia morning begins mixed in stock markets, The PBOC explains itself "this is not a shift in monetary policy," - except it is the first such set of measures since 2008, further deleveraging as China margin debt drops CNY1 Trillion from June peak to lowest since March, Regulators begin probing securities firms (and their malicious short sellers), Index futures trading fees will be raised and trading positions restricted. Stocks are limping only modestly higher (after the rate cuts) as Yuan is fixed at 6.4043 - the lowest since August 2011.

Yuan fix weaker for 2nd day to new 4 year lows...

• *CHINA SETS YUAN REFERENCE RATE AT 6.4043 AGAINST U.S. DOLLAR
• *CHINA LOWERS YUAN FIXING TO WEAKEST SINCE AUG. 2011

Before China opens, it's worth noting that all the post-China close, pre-China open exuberance from the PBOC multiple rate cut has been eviscerated...

And bearin mind that...

• *ABOUT 17% OF MAINLAND STOCKS STILL HALTED FROM TRADING

Some more good news as deleveraging continues... lowest since March 2015

• *CHINA MARGIN TRADING DEBT DROPS 1 TRILLION YUAN FROM JUNE PEAK
• *SHANGHAI MARGIN DEBT BALANCE HALVES FROM JUNE RECORD HIGH - Balance is lowest since Jan. 12

But more restrictions are put in place:

• CHINA TO RAISE TRANSACTION FEES ON STOCK INDEX FUTURES TRADING - EXCHANGE STATEMENT
• CHINA TO RESTRICT TRADING POSITIONS IN STOCK INDEX FUTURES - EXCHANGE STATEMENT

As things are not going well in the Communist intervention - so the probes begin (as ForexLive reports)

The South China Morning Post report that four brokers say the CSRC is probing their business

• Haitong Securities, GF Securities, Huatai Securities and Founder Securities
• All made stock exchange statements that they had received notices from the China Securities Regulatory Commission
• For suspected failure to review and verify clients' identities

Along similar lines, Xinhua reported:

• 8 people from Citic Securities were being investigated for  possible involvement in illegal securities trade
• A staff member from Caijing magazine was also being probed for spreading rumours
• A current and a former staff member at the CSRC  were also being investigated for suspected insider trading

Credit to Zero Hedge