2020-10-21

Chinese Reserves Fall Below 10pc of M2

In the short-term, reserve coverage is meaningless. In the longer-term, there are nearly 69 yuan of M2 floating around for every dollar of reserves. Higher if you include all credit money. M2 is growing at more than 10 percent per year.

Does China need reserves? Not if people are willing to hold the yuan.

Are they willing? If not, and China cannot grow reserves by running trade surpluses, it requires ever stricter capital controls because as the amount of renminbi grows, the percent leakage that causes trouble goes down.

None of this matters as long as markets don't care. If markets start caring again, things can go sideways fast.

Jeff Snider covered China again this week: CNY + TIC = October 2020, or 2017?

A hollow jump in CNY, more evidence for eurodollar tightening than loosening, and a mainstream media wild for inflationary scenarios utterly convinced there can’t be any others. What is this, the fourth quarter of 2020 or the fourth quarter of 2017? For China – and everyone else – they’d better hope 2020 represents meaningfully different. Otherwise, what I wrote in October 2017, the first time, would also apply if it does turn out this way: “Unless this works, they [hidden dollar shenanigans] will be added to the bill coming due at the worst possible moment (in other words, just like all the previous attempts).” While the world proceeds cautiously (and then hysterically) toward designs of inflation and recovery, the seeds of its reverse already sown.
There was a reflation attempt from 2016 to 2018, but the Federal Reserve bailed out. The same trends are underway as everyone piles into the same reflationary trades. This time looks much stronger with far more government stimulus on top of central bank activity. U.S. housing is signaling a rip-roaring boom. Assets such as gold, copper, wheat, Bitcoin, corn, nickle and lots more are in bullish breakouts. Many charts have bullish patterns. Barring a major reversal, the shorter-term signals point to continued strength in the reflation trades. If China doesn't show stronger fundamentals though, the risk that this is yet another illusionary rebound will grow.

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