Chinese banks now owe more dollars than they are owed. In short, China’s Banks Are Running Out of Dollars.
The combined dollar liabilities at the big four commercial banks exceeded their dollar assets at the end of 2018, their annual results show—a sharp reversal from just a few years ago. Back in 2013, the four together had around $125 billion more dollar assets than liabilities, but now they owe more dollars to creditors and customers than are owed to them.
Bank of China is by far the greatest contributor to the shift. Once the holder of more net assets in dollars than any other Chinese lender, it ended 2018 owing about $70 billion more in dollar liabilities than it booked in dollar assets. The other three lenders actually finished the year with more dollar assets than liabilities, though Industrial & Commercial Bank of China IDCBY -3.24% had a deficit at the end of 2017.
No Trust in the Yuan
The Chinese banks are covered by the Bank of China (China’s central Bank), currency swaps, and off balance sheet funding.
The Bank of China has over $3 trillion in reserves, so the current liability looks small in comparison.
But this masks the true state of affairs: There is no global trust in the yuan and the Eurozone is a basket case.
Spain Needs Another Bailout
Note that Spain Seeks Another Bailout as Deficit Skyrockets.
Very Deflationary Outcome Has Begun
A Very Deflationary Outcome Has Begun: Blame the Fed
Yet, Hyperinflationists Come Out of the Woodwork Again.
This is all too familiar, and amusing.
For further discussion, please see Inflation or Deflation? Collapse in Demand Trumps Supply Shocks
Mish
Yeah China is collapsing: link to youtu.be
This guy is a hoser eh?
Seriously, this is a terrible analysis.
Mish you are correct that demand for dollars is rising in China but its really not a surprise, because another issue is that Chinese companies have substantial US dollar obligations. There has already been a lot of discussions (by the money supply people) about the likely shortage of US dollars in China, and that the solution for the BoC is to sell US Treasuries to get USDs.
When I was growing up dollar bills said Silver Certificate where they now say Federal Reserve Note. There are 3 metals that are highly conductive of electricity. Gold, Silver, and Copper. The best one is Gold because it does not corrode. No one wires their house with Gold. A tad too expensive. Forget the ads, it is not a stupid rock.
Deflation. No matter how much money the Fed stuffs into the banking system it has no velocity. People are not rushing out to buy Gucci bags before the price goes up.
Good point, they’ll use it for toilet paper instead!
In theory aren’t there times when it could foster more velocity?
For example, if the Fed buys a bunch of mortgage assets from a bank, would that not free up the bank to lend out more money in the form of mortgages?
I think we have too much debt saturation, but it seems like it could spur velocity in theory under the right conditions.
In order to lend out you need a borrower with a need for the money and very good credit or collateral.
Keynes called it “Pushing on a string.”
If the Bank of China has a net USD liability, then too whom? Western countries with natural resources? Did the Chinese try to keep raw material and energy prices down by purchasing very long-dated futures on margin?
Mish, how much of this do you think is being caused by dollar based loans defaulting?
do not know
“The Bank of China has over $3 trillion in reserves, so the current liability looks small in comparison.”
…
WAS $4 trillion
WITH trade surpluses
Now? With trading partners reeling? And a huge mountain of domestic (bad) debt that needs to be papered over at SOME point?
Put me down for a massive yuan devaluation (internal) in the cards … if not, as foreign reserves bleed lower … a run on currency (external).
There’s only one country in the world who thinks that the Yuan should be at 7 or lower. That country is the United States of America.
Everybody else (including China) thinks the currency is overvalued. That’s why they loosened the band back in 201x? The Chinese is only doing this to appease the Treasury for fear of being accused as a currency manipulator.
Putting on my tin foil hat, the US Government wanted a strong Yuan, so that the Chinese could help pull the US out of deflation by buying real estate, etc.
Trump and Xi appear to be saber rattling in front of us, but it wouldn’t surprise me if they have a habit of doing a Zoom call every week or so to laugh at us muppets.
You are as wrong here as you are on inflation.
Stick around for The Show.
We disagree on the definition of inflation/deflation in the first place, so both of us will ALWAYS be wrong in each other’s eyes. There’s no need to stick around. You said you r definition of deflation closely mirrored Mish’s. That’s not my idea of deflation.
Would the fact that there is debt saturation across the board at all levels of US society be deflationary? People/corporations/city and state governments can’t afford to take on as much new debt. Some of the old debt will be defaulted on.
Look at housing. There will be less buyers as people are debt saturated, wanting to build up an emergency savings, taking pay cuts, and are worried about the future. Moreover, there will be some foreclosures. Demand to buy should drop and supply of homes for sale might increase at the same time. Home prices should drop – I would think.
“Demand for Dollars is High: Chinese Banks Running Out”
…
The Federal Reserve Bank has standing currency swap arrangements with central banks of Japan, Canada, Switzerland, England and the ECB.
Back in March Federal Reserve announced temporary arrangements with central banks of Australia, Brazil, South Korea, Denmark, Norway, New Zealand, Sweden, Mexico, and Singapore.
Are we missing anyone?? ….
Noticed same, either not mentioned or China has to use intermediaries
Indonesia
Interesting interview with Lacy Hunt. His explanation for why deflation instead of inflation is that our wise leaders would not print so much as to cause inflation, because, that is too damaging. My only question is: if our leaders are so wise, how did we get here?
They’ve clearly learned from their mistakes, and are the only ones that can lead use out of this debacle that nobody could have seen coming.
“They’ve clearly learned from their mistakes, and are the only ones that can lead use out of this debacle that nobody could have seen coming.”
I really hope you are being sarcastic…
“My only question is: if our leaders are so wise, how did we get here?”
I agree. I was arguing with another person about the out of control Fed. He too said that the Fed will ultimately do the right thing to prevent a currency collapse. Well first of all the US Dollar has lost a ton of its value over the years, so “currency collapse” is simply a matter of definition. However we are also talking about an entity that’s been a serial bubble blower and promoter of the whole 2% inflation bullshit. The notion that the Fed knows that as long as we don’t print beyond X dollars, we’ll be fine is by itself a super ridiculous notion.
We’ve NEVER had wise leaders. The Greatest Generation was driven by necessity, not by some mythical virtue.
For the world to use the Yuan, either there has to be a war where the US is defeated OR the US implodes on its own.
Also supposedly the Chinese holds a ton of Gold.
“..OR the US implodes on its own.”
Well, there’s no longer any OR about that.
Even with the US going the way of Rome, I doubt the world will bestow the kind of trust on China, that it did the US post WW2. They may need lots of Yuan for trade with China proper, but other than Chinese satellite economies like perhaps Hong Kong, I doubt many will, for example, peg local currencies to it. And neither will the rest accept that international bodies like the IMF, World Bank nor UN operate in Yuan the way they now do in Dollars. In many, poorer parts of the world, those agencies form a large part of finances.
The US enjoyed an absolutely enormous surfeit of trust and goodwill in The West and parts of Asia at the end of WW2 and in the early years of the Cold War. Which is why the rest ended up, stupidly in hindsight, accepted subordinating their foreign affairs to it, to the extent they did. Which, as always, backfired. Just like how Americans’ trust in the legitimacy of the Government and Constitution The Founders left behind, caused them to slack off on their obligation to keep repeating the revolution every generation. With the disastrous result that is America today.
Honestly, I no longer want a world where a country has the ability to dictate the affairs of another country. Stop all the wars. Stop all the economic intervention.
There are so many of us, and our supply chain so intricate, that I think revolution would kill more people by orders of magnitude than any before. We waited too long, the underbrush got too thick, and the deferred fire will kill the forest.
Probably the only choice left is to defer as long as possible, which is what the FED is doing.
For the world to use the yuan.
Minimum
China meets 0 of four absolutely essential requirements
To become a reserve currency, China must also be willing to give up export mercantilism and accept trade deficits
This is why I laugh at people who tell me the yuan will replace the dollar.
Did the large liquid bond market come before or after the US “victory” in World War II?
Many other countries also had floating currency, property rights and no capital controls. But of course they were all destroyed.
Trade deficits is a must, but that comes AFTER, not BEFORE one’s currency becomes the reserve currency.
Is there a difference between using the yuan, perhaps in a digital crypto form as opposed to using it as a saved/reserve asset?
I would wonder if China could wreck US sanctions in places such as Iran using a national crypto currency while using gold as a reserved asset.
The inflation/deflation debate is silly since it all depends on how the government/Fed behaves. Obvious we are in a huge debt deflation caused by irresponsible lending and Fed policies. Whether we have deflation or inflation depends on the degree of counterfeiting. Of course, counterfeiting solves nothing. It just shifts the cost of bad decisions onto the backs of the forgotten man.
I agree. I don’t know why people think oh will it be inflation or deflation when the value of the currency is set directly by the central bank with government oversight. Who control the interest rate, the regulations concerning credit expansion, set a ceiling on wages in many areas by increasing the labour supply through skill based migration, actively and regularly intervene in market pricing of debt, set the rate of capital gains taxation, regulate ownership of precious metals, decide the level of purchase tax, existence or lack of capital controls.
Biden is an Einstein compared to Dementia Donny, aka President Covfefe, who called windmill cancer a threat, but called covid a hoax.
China is in for a very hard landing, or is it?
They are the one that make all the stuff. Do they need the US to buy the stuff? What if they bought their own stuff?
They are a totalitarian regime. The CCP can scrape the assets/liabilities ledger and throw it in the wastebasket. They can then have people back in the factories producing goods for the Chinese under a new monetary regime. The US will have a shortage of goods and stagflation.
Long term, if you have two guys: One who is capable of such feats of economic greatness as manufacturing a noodle bowl; and one who is not and is only able to manufacture empty promises of self flying teleportation devices; if trade breaks down, the one with sufficient competence to feed himself, is definitely better off than his incompetent counterparts. No amount of “trade flow” or “deficit” nonsenstistics can change that.
But while that argument may be valid and conclusive on a macro scale; in practice, the Chinese economy consists of millions of decision makers, each of whom have both domestic and foreign counter parties; pretty much all of whom are currently set up to trade in dollars. They could change over to something else, but that reorganization will in many/most cases take long enough to exhaust their ability to stay solvent and service the massive amount of debt almost all so called “successful” economic entities have been suckered into taking on in the Age of Totalitarian Financialization.
So, even within China, the wealthy and powerful, is very much dollar dependent. And while, overall, China as a whole would be better off getting away from that addiction, getting there hence entails bankrupting current owners. Which, as always and despite protestations from clueless self proclaimed “job creators”, don’t really do much damage to the economy overall, since the capital and skills remain even under new owners. But you can be sure the ones who will be bankrupted during the changeover, won’t be happy about it. And, as the current owning, hence ruling, class, they hold a lot of sway, even in China.
Good points Stuki, but the regime can change things in such a way to make those with some amount of wealth and power happy. In addition, they can blame the Covid crisis and the US for all the country’s ills. We saw this being done in China back in 2012 against the Japanese over the Senkaku Islands.
Is China self-sufficient in food? I believe that the US is and is a major food exporter, but I’m unsure about China. With 1.4 billion people, that’s a lot of mouths to feed.
Slightly topic-adjacent, but are governments looking at cryptos as a capital flight risk?
The Sausage King of Chicago is into crypto?? Who would have thought!
Don’t make me get snooty.
China is – Yes
So far that is it
China has capital controls.