More important than China’s gold announcement, U.S. banks scared of dollar dumping as buyers dry up

When China announced their long awaited gold reserve update last week, both the markets and analysts were mystified at just how low the reported reserves were, especially since many knew that China was producing over 2000 tons per year, and buying upwards of 1000 tons per month over the past two years.  And while the news did little to affect the dollar or change opinion on the future of China’s currency, something else came in under the radar that is scaring U.S. banks immensely.

China is dumping their dollar reserves, to the tune of over $500 billion in just the past five quarters.

On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.

JPM’s conclusion is actually quite stunning:

This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate.

Finally, if China’s selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market. – Zerohedge

china capital outflow

It is interesting to note that over the past five quarters (1.25 years), the dollar has seen a rapid strengthening which is usually indicative of a smaller money supply.  And if China and other nations such as Russia are cashing in their T-bills and cashing in their dollars back to the Treasury or Fed, then that money is no longer in use worldwide, and is in the long-term causing exports from American companies to cost even more.

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(One year dollar chart, or approximate dollar movement since China began dumping their reserves)

Actions within the global marketplace are moving fast and volatile since the beginning of summer, and are effecting everything from gold, oil, currencies, debt instruments, and corporate earnings.  And like in 2007, when cracks in different asset markets became warnings to a much greater crisis that would come just a year later, we could be seeing the same thing as no economy appears bulletproof, and government and central bank responses are engineered to protect their own, rather than stabilize markets that reside outside their own dominion.

And thus more dollar dumping to re-capitalize and protect assets will be the norm going forward.

Kenneth Schortgen Jr is a writer for Secretsofthefed.comExaminer.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.

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