The gold guys at zerohedge have noticed something interesting—since the beginning of the year the Chinese government has sold off $150 billion of U. S. Treasuries, about 10% of their total holdings, and bought gold:
While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.
But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China’s Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman… and this website of course.
No one seems to know exactly why the Chinese are taking this course of action, as the linked post documents. zerohedge seems to think that, if the Chinese continue the sell-off, it will strongly encourage the Fed to buy up the slack. The explanation that occurs to me is that the Chinese are continuing what they’ve said they’d do, move from a dollar peg to a peg based on a market basket of currencies and they’re continuing their diversification out of dollars. Or the Chinese may be concerned about Fed policy, something they’ve indicated in the past.
Or, of course, we may be seeing the CCP’s end game. It’s a lot easier to disguise the provenance of gold than that of U. S. Treasuries.
A division of the PLA mines gold domestically and hands it over to the Ministry of Finance, so we really have no idea what China’s gold reserves are.