In overnight trading, China experienced an equities meltdown following their largest devaluation of the Yuan since August. And at the heart of protecting the RMB in this trend of currency intervention is a new report on Jan. 7 which shows that the Far Eastern economy dumped $108 billion in dollar reserves in the month of December, dropping their reserve totals from $3.438 trillion to $3.330 trillion.
Much of this devaluation, equity declines, and dollar dumping are in response to the growing global recession that is not only hitting most emerging markets, but has daisy chained over to Europe and the U.S. where China is now the tail that wags the dog, and for the most part dictates the actions and reactions of the rest of the world that follows their market results.
As the PBOC revealed overnight, China’s foreign-exchange reserves plunged much more than forecast in December, capping the first-ever annual decline (of $513 billion) as authorities sought to prop up a weakening yuan. More importantly, the $108 billion decline from $3.438 trillion to $3.330 trillion - far greater than the $20 billion estimated - was the largest on record, and shows that while on the surface the Yuan was stable, behind the scenes the PBOC was furiously dumping securities to prevent an all out currency rout as outflows hit a record.
To be sure, the massive intervention explains the relative stability of the Yuan in November and December. However, it appears that the Chinese central banks has decided to stop intervening aggressively, if at all, in 2016. By now, everyone has seen the result: “the weakening of the fixing contributed to a selloff in stocks that led exchanges to close early on Monday and Thursday after the retreat triggered new circuit-breaker mechanisms. China’s CSI 300 Index plunged 7.2 percent Thursday.” - Zerohedge
Since China began the move to internationalize the Yuan, there have been many pitfalls that have required hundreds of billions of dollars to be dumped from their reserves to protect the currency, and ensure that their exports remain enticing to foreign markets. And what makes their timing more difficult is that the rest of the world is in an ongoing currency war, and devaluation is the norm for many of China’s trade partners.
China still has alot of ammunition in its arsenal to keep up its program of intervention and stability, as their interest rates are relatively high compared to other developed nations, and their dollar reserves are still comfortably in the multiple trillions. But at a certain point the economic slowdown will force the Far Eastern power to take more drastic steps to secure the Yuan, and that may entail bringing out their gold reserves, which will then change the game entirely.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.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.