It's Official: China Is The "Mystery" Daily Buyer Of Billions Of Euros
This is rather significant. Tracking China’s FX flows has been used to help explain the position that the increase in London purchases that coincide with decreases in Chinese purchases have historically just been Chinese purchases in disguise (TIC data lags a bit, but offers no reason for concern). With China actively selling the dollar and buying Euros, we could be experiencing a trend change.
How significant is this? Possibly significant but probably not very significant. Dollars can float around, but they either end up as foreign reserves or coming back to make purchases of dollar-denominated assets. That’s called stock-and-flow analysis, and I just saved you a lot of reading. Dollars not ending up as foreign reserves could take the form of treasuries (which usually count toward capital reserve requirements), US stocks (a good thing for stock prices), or more strategic investments like golf courses (remember the Japanese property bubble fueling that Pebble Beach purchase?) or US ports (which Congress gets to poo poo for security reasons).
There’s not much of a shortage of people who have Euros who want treasuries right now. This could change if Europe comes up with a clear plan on how to handle their banking crisis. But, since the only two viable options are either to hose the banks or hose their citizens, making the plan clear isn’t necessarily the wisest of political moves.
Note that this could also change if investors actually thought that the debate on the US debt ceiling was anything more than political theater. As the deadline approaches, someone might get nervous.
Bonus! While trying to find a particular link, I came across a bit of news: apparently our estimates of how much US debt China has accumulated may not be all that accurate.
Oh wow. Sneaky. I’m going to assume that China is doing this because they would rather not see another financial crisis. Or is it because they realize the US dollar is declining fast in relation to commodities, and they’re wanting to keep some ability to import food and fuel? Or do they want to be able to exert economic influence over the eurozone like all those dubious American political ads? What’s going on here?
