What Does It Mean If China Has Run Out of Dollars?
Posted by freedomforall 4 months, 1 week ago to Economics
Does this shed any light on China's interests in gold?
Excerpt:
"Since 2009, China has amassed between $2.5 trillion and $3 trillion worth of US dollar-denominated loans, effectively hedging their $3.2 trillion of forex reserves. What originally looked like an intelligent move to insure against Federal Reserve profligacy, now represents a significant hurdle to overcome in attracting foreign capital.
A sharp drop in the yuan versus the dollar and a further decline in US imports of Chinese-made goods and that dollar-denominated debt becomes untenable. That’s when it becomes a huge problem for the unregulated Eurodollar markets that supplied the funding. In other words, the global banking system is on the cusp of having a massive hole blown in it when the yuan eventually reaches intrinsic value and the Chinese are unable to service Eurodollar debt.
Deflation in its simplest form means loss. If you’re Tom Brady, you remove air from a football and the world calls it “Deflategate”. If you have an unsustainable high opinion of your worth, you are subject to having your ego deflated. In economics, they tell you that the general price level has declined, blah, blah, blah.
Deflation means losses. If a nation’s banking system makes bad loans in the collective, that nation will experience deflation because money in circulation declines when the banking system incurs losses. This is what happened in the US in 2008 which is why the Fed started quantitative easing, or QE. In effect, they injected dollars into the banking system to replace the dollars destroyed with bad investments. According to HSBC, the People’s Bank of China has “printed” 15% of currency in circulation over the past year as a means towards offsetting part of the deflation in their domestic economy. It’s not nearly enough.
...
We may not have the numbers to conclude that China has run out of dollars but we can deduce China’s reserve predicament by observing what China is doing in international markets. They are flooding the world with their excess production instead of developing their own domestic markets. They are also paying higher prices for their imports even as their consumer and producer prices fall.
China is built on debt; there is practically no equity to soften their decline. They may be the world’s leading manufacturing nation but manufacturing brings both operational and financial leverage and China has extraordinary excesses of both. Slowing demand makes both forms of leverage unbearable thanks to cost absorption over fewer units.
Let’s use the steel industry to illustrate this point. In 2023, China represented 50% of global steel output by tonnage but only 30% of steel output by value. For all of 2023, Chinese steel exports rose by 36% based on tonnage but declined by 8.3% by value. That, my friends, is dumping. We can observe similar behavior in electric vehicles, solar panels, and lithium batteries.
Making matters worse, Xi Jinping has directed state-owned enterprises (SOE’s) to “bet the ranch” on EV’s and green energy right when the Western world is coming to its senses on the viability of this form of transportation and energy. Europeans are cutting back on EV purchases even as BYD’s cheap EV cars are piling up on the dock in Rotterdam and Bristol.
The biggest problem for China, by far, is the fact that contract manufacturing is migrating out of China and with it, China’s biggest source of dollars in trade. The once bustling cities of Shenzhen, Dongguan, Guangzhou, and Hangzhou are starting to resemble Detroit with empty factories and apartment buildings. The private owners of these factories are closing their doors because there are insufficient orders from foreign buyers. The ones that do keep the lights on are forced to price at the margin and often finance the orders themselves. We normally see this kind of activity in companies that are close to bankruptcy where they are simply generating cash flow to make it to next month.
...
I’ve got two indicators. The first is the yuan. When it decisively breaks above 7.36 to the dollar, it will be game-on.
The second is copper which I believe is elevated from a false belief that we’ll aggressively add to the electric grid to accommodate artificial intelligence. When copper breaks below 3.20 on the CME along with a weak yuan, deflation will follow.
I don’t know when it’s going to break because China has been holding onto the ghost since 2016. It’s also an election year in the US. But ultimately, cash flow forces markets to clear at intrinsic value for at least a little while and that’s why my best advice is to expect this to be the second act after something else breaks the markets. "
Excerpt:
"Since 2009, China has amassed between $2.5 trillion and $3 trillion worth of US dollar-denominated loans, effectively hedging their $3.2 trillion of forex reserves. What originally looked like an intelligent move to insure against Federal Reserve profligacy, now represents a significant hurdle to overcome in attracting foreign capital.
A sharp drop in the yuan versus the dollar and a further decline in US imports of Chinese-made goods and that dollar-denominated debt becomes untenable. That’s when it becomes a huge problem for the unregulated Eurodollar markets that supplied the funding. In other words, the global banking system is on the cusp of having a massive hole blown in it when the yuan eventually reaches intrinsic value and the Chinese are unable to service Eurodollar debt.
Deflation in its simplest form means loss. If you’re Tom Brady, you remove air from a football and the world calls it “Deflategate”. If you have an unsustainable high opinion of your worth, you are subject to having your ego deflated. In economics, they tell you that the general price level has declined, blah, blah, blah.
Deflation means losses. If a nation’s banking system makes bad loans in the collective, that nation will experience deflation because money in circulation declines when the banking system incurs losses. This is what happened in the US in 2008 which is why the Fed started quantitative easing, or QE. In effect, they injected dollars into the banking system to replace the dollars destroyed with bad investments. According to HSBC, the People’s Bank of China has “printed” 15% of currency in circulation over the past year as a means towards offsetting part of the deflation in their domestic economy. It’s not nearly enough.
...
We may not have the numbers to conclude that China has run out of dollars but we can deduce China’s reserve predicament by observing what China is doing in international markets. They are flooding the world with their excess production instead of developing their own domestic markets. They are also paying higher prices for their imports even as their consumer and producer prices fall.
China is built on debt; there is practically no equity to soften their decline. They may be the world’s leading manufacturing nation but manufacturing brings both operational and financial leverage and China has extraordinary excesses of both. Slowing demand makes both forms of leverage unbearable thanks to cost absorption over fewer units.
Let’s use the steel industry to illustrate this point. In 2023, China represented 50% of global steel output by tonnage but only 30% of steel output by value. For all of 2023, Chinese steel exports rose by 36% based on tonnage but declined by 8.3% by value. That, my friends, is dumping. We can observe similar behavior in electric vehicles, solar panels, and lithium batteries.
Making matters worse, Xi Jinping has directed state-owned enterprises (SOE’s) to “bet the ranch” on EV’s and green energy right when the Western world is coming to its senses on the viability of this form of transportation and energy. Europeans are cutting back on EV purchases even as BYD’s cheap EV cars are piling up on the dock in Rotterdam and Bristol.
The biggest problem for China, by far, is the fact that contract manufacturing is migrating out of China and with it, China’s biggest source of dollars in trade. The once bustling cities of Shenzhen, Dongguan, Guangzhou, and Hangzhou are starting to resemble Detroit with empty factories and apartment buildings. The private owners of these factories are closing their doors because there are insufficient orders from foreign buyers. The ones that do keep the lights on are forced to price at the margin and often finance the orders themselves. We normally see this kind of activity in companies that are close to bankruptcy where they are simply generating cash flow to make it to next month.
...
I’ve got two indicators. The first is the yuan. When it decisively breaks above 7.36 to the dollar, it will be game-on.
The second is copper which I believe is elevated from a false belief that we’ll aggressively add to the electric grid to accommodate artificial intelligence. When copper breaks below 3.20 on the CME along with a weak yuan, deflation will follow.
I don’t know when it’s going to break because China has been holding onto the ghost since 2016. It’s also an election year in the US. But ultimately, cash flow forces markets to clear at intrinsic value for at least a little while and that’s why my best advice is to expect this to be the second act after something else breaks the markets. "
1. "When all debt instruments – loans and bonds – pay interest and principal as they are supposed to, money supply grows."
Come again? How does that work exactly? It seems to me when interest is paid, all that is happening is money changing hands and no new money is added to the system. Additionally, if the loan was made by creating money out of thin air (as is the case in a fractional reserve system), when you pay off principal that money gets destroyed, hence the money supply shrinks, exactly the opposite of what this article is saying.
2. "When some of those debt instruments go bad, the amount that gets written off reduces money supply."
No, that is not what is happening. As I understand, writing off bad loans means that they are just not going to be paid off probably ever. That means less shrinking of money supply. That means less deflation.
3. Deflation means losses.
Not really. Some actors win, some actors lose, it is the inverse of inflation. As I understand it, it is more or less net zero in the grand scheme of things. In a fractional reserve system, money supply increases when loans are made and decreases when loans are paid off. So, if everybody all the sudden stopped getting loans and started paying off their loans, deflation is what happens. It is the reverse process to one that took place when everybody's loan debt was going up (inflation). So, this deflation is not necessarily bad, it is just the process of returning to the previous money supply levels. It might be bad for people who have to pay off loans, but what did they expect, there is no free lunch. They are the victims of the boom bust cycle. Maybe stop printing money for loans and end the fractional reserve system?
The reason why China is having a trouble right now is because foreign companies are moving out due to a number of issues, such as geopolitical and legal risks, etc. Also, they mismanaged their investments on a huge scale mostly due to massive corruption, which means a lot of wealth has been lost. They have plenty of other problems, no need to blame this on monetary phenomena.
Someone correct me if I am wrong.
blame someone else and likely start a war