“It is neither the sell-off in Chinese stocks nor weakness in the currency that matters most. It is what is happening to China’s FX reserves and what this means for global liquidity. China’s actions are equivalent to unwind of QE or, in other words, Quantitative Tightenting.”
George Saravelos, currency strategist at Deutsche Bank/as published in this morning’s Financial Times (London edition), see Henny Sender’s column
MK note: This quote accompanies news today that China unloaded $93.9 billion in currency reserves in August, a record. One wonders how much of its reserves China is willing to surrender in order to boost the yuan and stem outflows, particularly when market forces seem caught up in enforcing the currency’s downtrend. Might be best to simply step out of the way and let the market sort this out on its own. Remember, it was the prospect of a drop in the yuan that drove gold higher a couple of weeks ago. Since then the market signals have been mixed at best until today’s announcement – coming on a day that the U.S. markets are closed. In the unlikely event that China continues with the reserve sales, our own Federal Reserve will need to confront a bond market being flooded with U.S. Treasury paper – quantitative tightening in the extreme and a conundrum to which Fed chair Janet Yellen would probably rather not have her name attached.
In that same column, Henny Sender ends with this:
“A combination of future Fed tightening, less money in need of recycling in the hands of oil producers and the uncertain consequences of changing circumstances in China is enough to turn most bulls into fearful bears.”
Sender’s reference to the recycling capabilities of oil producers probably has to do with a ready market for Treasuries being sold by China.