Wednesday, September 23, 2015

Economic Fallout Looming | China May Have to Sell $1.2 Trillion in Reserves Every Year

All the world's national economies are tied together by way of trading programs and debt swaps. When a nation is unable to trade with another nation, such that the inflow of goods does not match the outflow, now there is a trade deficit which must be offset by bonds; debt instruments. 

China's economy, while being strong in production, is wholly dependent on first world nations for export. When the economies of the export nations, like the US and EU members, decreases then the value of their bonds decreases and the trade deficit goes up, which in turn lower's exports. In order to keep the flow of trade going, nations resort to several techniques. 

Importing nations such as the US and EU can print more money (loans and bonds) to offset the trade deficit but eventually if this quantitative easing continues, the value of their currency drops and this affects the exporting economy. China decided to devalue it's currency in response as well as bolster it's local production by injecting private cash flow into it's economy. 

This program of private lending will work for a while, but eventually those in house loans must be paid, but since production hasn't gone up, there is nothing to do but roll over the debt and begin foreclosing on assets. China began devaluing its currency and assets to settle it's books, doing everything it can to stave off a growing wave of private bank debt as well as reduced trade demand from first world nations. 

At this point, private lenders in China are not confident in the Chinese economy to recover, and with a great deal of infrastructure going unused and becoming devalued, it's only a matter of time before this nations ability to payback its loans also meets a devaluation of assets on it's books. The central bank of China can do it's own quantitative easing to hedge the debt, but these actions places the burden on to the backs of the people. 

In other words, debt slavery systems which have almost completely destroyed the US economy are have been working in China for decades. There is really only one outcome for this mounting pile of debt; economic collapse. Eventually the debt will consume China's fragile economy, and with no ability to produce goods due to asset devaluation, it will spread across the globe as transnational trading platforms fall apart. 

In the face of this looming collapse what can really be done? Like Iceland, the people never properly agreed to these imperialistic economic policies. The current state of the global economy is the result of an elite group of economists and corporations principally focused on profit driven models designed to leach energy out of a people, consolidating it in the hands of bankers and creditors; the money masters. And due to pervasive ignorance within the masses, we accepted these systems lock, stock and barrel; we were duped into fraud.

Related How and Why "The Money Masters" Took Control (Full Documentary)

The people must realize that they have been defrauded and take actions to regain control over the economy which has fallen into the hands of foreign insurgents. This will allow any debt placed on the backs of the people, under fraudulent means, to be wiped clean and a new economic model to replace it. 

Related The National Debt Is Not For Americans To Payback | History of The Corporate Takeover of The Continental United States

The BRICS bank could be that model, but I would argue that the only lasting economic framework is one based on debt-free money printed by the people and maintained as a public service. 

All of the economic woes of our age are founded on debt-based interest money, that services a small group at the cost of everyone else. If humanity is to finally crawl out of the millennia of oppression and servitude, it must recognize that for-profit economic models are inherently immoral, as they seek to service the rich at the cost of the poor. 

For now, the people have become complacent and ignorant of these systems, and the present climate of economic upheaval will provide a pathway for each person to understand why a better way is needed; for ourselves and posterity. So don't loose heart, because before the duped masses can be driven to seek remedy and recompense, they must feel the sting of their unwitting mistake. Those of us who can see the fraud clearly can help our fellows recognize the truth, when they have opened their minds enough to do so. 

- Justin

Source - The Epoch Times

Ever since the Chinese economy started slowing and the country surprised markets with a currency devaluation in August, analysts have been scrambling to lower their estimates for pretty much anything concerning China.

Only one estimate is going up and that’s the one for capital outflows and the subsequent drain on foreign exchange reserves.

Since June this year, some estimates put the total number of outflows as high as $300 billion. In order to service the outflows and stabilize the exchange rate, China had to sell about $400 billion in foreign exchange reserves since August 2014. This number could reach $1.2 trillion in a “downside scenario,” according to Barclays.

“In such a downside scenario there could be pressure on the central bank to provide about 10–12 percent of GDP [up to $1.2 trillion per year] in reserves to the market to offset outflows as well as hedging demand,” the bank wrote in a note.
Repaying external debt will be a drag on reserves. (Barclays)

The analysts particularly highlight the fact China will have to pay back a large chunk of $1.4 trillion of external debt within one year. Repaying external debt means taking money out of the country and moving it offshore to settle the repayment, a net outflow.

According to the analysts, this is the unwind of the infamous carry trade, where speculators borrowed U.S. dollars to fund purchases of assets denominated in Chinese yuan.
Previously, investors and speculators who managed to get money into China got a sweet deal. Borrow at very low rates in U.S. dollars, invest the money for a guaranteed 10 percent in China, and don’t worry about defaults (forbidden by policy) and currency risk (pegged to the dollar).

The very fact that the first defaults have happened in China, at the beginning of 2014, and the currency is no longer risk-free (August devaluation) scared many investors out of the carry trade and led to the unwind.

“Given the growing uncertainties surrounding China’s growth outlook and currency path, there has already been a slowing in the pace of demand for the yuan carry trade. Any future liquidation may increase the demand for dollars as capital outflows intensify, offshore yuan volatility increases, and the currency weakens,” the analysts wrote.
Capital outflows are on the rise again in China. (Barclays)

The recent China Beige Book report of on-the-ground surveys supports this narrative. It states both yields on bank loans and domestic bonds have fallen sharply, indicating domestic monetary easing and a weaker currency.

For the United States, it could mean sharply higher interest rates if China unloads $1.2 trillion of its remaining reserve stash of $3.5 trillion, a third of which consists of Treasury bonds.

Of course, China could also just let its currency drop 20 percent and keep the reserves, but it seems it is not quite ready for this kind of free market action.




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