Does China have enough dollars?

Tyler Cowen linked to an interesting article on China’s financial situation:

The government’s dramatic about-face from encouraging aggressive overseas acquisitions to cracking down on risky lending and overseas transfers underscores worries over the risk that the nation could run short of enough US dollars to make the interest and principal payments on its mounting debt at a time when the current account balance is coming under pressure. . .

On the surface, China should be the last country to worry about a US dollar shortage given that its US$3.1 trillion worth of foreign exchange reserves is the largest help by any nation.

But analysts believe China’s reserves may be insufficient to pay for its massive imports and debt payments in response to a worse-case scenario caused by the ongoing trade war with the United States, particularly since many of its assets cannot readily be turned into cash to help the central bank to save a crashing financial system or sharp devaluation of the yuan’s exchange rate.

I don’t feel qualified to discuss the details of the article, but the overall thesis seems plausible.  Rather, I’d like to discuss two implications of this claim, which might not be obvious:

1. Previous accusations of Chinese currency manipulation were probably unfounded.

2. Contra Trump, monetary stimulus by the Fed would make it harder for the US to win the trade war.

The accusation that China engaged in currency manipulation during the 2000s and early 2010s (not recently–no one except Navarro believes they are doing it today) is based on the premise that China’s forex reserve accumulation was “excessive”.  If it was not excessive, if they don’t have enough reserves, then the entire currency manipulation claim collapses.

If the Fed engages in an expansionary policy that injects lots of dollars into the global economy, reflating nominal incomes, then debts become easier to service.  This helps the US somewhat, but probably helps China a lot.  It might make it easier for China to ride out the trade war without negotiating.  Trump should be careful what he wishes for.

Or perhaps Trump is playing 6 dimensional chess.  He knows that constantly berating the Fed will make them even more determined to look “independent”.  And he knows that global dollar deflation will put extreme stress on China’s finances.  Yeah, that must be what’s going on.



7 Responses to “Does China have enough dollars?”

  1. Gravatar of George George
    12. August 2019 at 11:25

    The CEO of HSBC (James Lyin’ Leakin’ Comey was on the board) was terminated shortly after it was disclosed that they gave the PBOC a $200 billion USD loan.

    All in secret from regulators.

    China has indeed been manipulating their currency. They cannot survive as is without looting from their own citizenry by forced USD/YUAN below market exchange rates, i.e. ‘dirty float’.

    China is a House of Cards.

    Trump has been rebalancing the unfair trade deals that used to favor the oligarchs at the expense of American and Chinese workers.

    In related news, something bad looks to be happening re: HK/China.

    Military trucks are forming at Shenzhen, just across the border of Hong Kong.

    The ‘humanitarian’ Demokkkrats are completely silent.

    Meanwhile, HK protesters are waving the American flag and signing the anthem.

    Joe Biden’s son received a $1 billion investment from China. Political favors to keep the slush funds going to the oligarchs. They definitely want Demokkkrats back in power.

  2. Gravatar of brian mccarthy brian mccarthy
    12. August 2019 at 12:26

    the HSBC rumor above is wholly unsubstantiated, though does highlight an important issue in this regard. There is an as yet unexplained gap between China’s FX intervention activities in 2015-16, totaling by common estimates ~$1.5T and the $1T by which they drew down reported reserves. It’s very likely that Chinese banks are carrying a $500bn USD short in forward FX contracts with global banks (so the HSBC story is eminently plausible, but I would stress wholly unsubstantiated).

    Chinese banks are to this day engaging in this activity, as detailed by Reuters last week ( Instead of using FX reserves for intervention, Chinese banks source USD by engaging in FX swaps with offshore banks (they buy USD spot / sell USD fwd and then sell the spot USD for intervention purposes).

    Here’s the rub…

    If China rolls into H.K. in some form, even if non-violently, it puts several sources of USD supply at risk. Some $900bn in offshore USD bonds outstanding become hard to roll and the availability of new USD financing to Chinese corporates will dry up. It’s likely that the expected inclusion of Chinese Government Bonds into the various global bond indices will be derailed (the MSCI inclusion is already under political scrutiny). And I would also posit that foreign banks will curtail the provision of USD to Chinese banks via FX forwards.

    So to the extent there is a Dollar crunch in China (and there is), is could get a lot worse very quickly if events go pear-shaped in H.K.

  3. Gravatar of Joseph Calhoun Joseph Calhoun
    12. August 2019 at 12:32

    Dear George,

    Been reading Kyle Bass’s twitter feed again, huh? You do know he hasn’t been right about anything since 2008, right?

    If the Chinese let the Yuan float it’d be 8 or 9 to the dollar not 7. They’re holding it up, not down. Please check your attitude control.

    Oh, also, you need to adjust your tinfoil hat. I think you’re picking up Pravda. Or maybe it’s just PJ Media.

  4. Gravatar of Neon__Wolf Neon__Wolf
    12. August 2019 at 13:37

    Wow, look at the salty tears.


    No, I didn’t read it from Kyle Bass, and no, it is not “wholly unsubstantiated”.

    I did my own research.


    What was Larry Summers doing at an island owned by a pedophile rapist?

    I’d bet it wasn’t his intelligence that explains his cushy “economic advisor” job under Obama.

  5. Gravatar of ssumner ssumner
    12. August 2019 at 15:29

    Brian, Interesting, but can you explain why rolling into HK would cut off their supply of USD. Are you making a political argument (there would be sanctions) or a technical argument, that the HK markets would shutdown and this would disrupt the flow of financing?

  6. Gravatar of Benjamin Cole Benjamin Cole
    12. August 2019 at 16:03

    There is also a prominent line of thinking that the Chinese yuan is actually much overvalued, but has been held up by the People’s Bank of China.

    It is indisputable that on any particular day, the People’s Bank of China sets brackets in which it maintains the value of the yuan.

    Then, by deduction, we either conclude the People’s Bank of China manipulates currency, or uselessly mimics free-markets through a complicated system of daily bracket setting.

    The usual reason given for the People’s Bank of China artificially maintaining a bloated yuan value is the one mentioned in this article, that Beijing worries it will be unable to honor dollar debts. The cheaper the yuan the more of those dollar debts will cost to honor.

  7. Gravatar of Brian McCarthy Brian McCarthy
    13. August 2019 at 03:19

    when I think about China going into HK in some form its hard for me to see them ever getting out. It’s pretty much the end of “one country, two systems.”

    I think this could be a demarcation point in “decoupling.” China loses the UK immediately. The Conservatives in Canada, if they win, are talking about tariffs in response the snatching of the two Canadians in China. Sentiment in Australia has already turned severely against China. Huawei is instantly shut out of most developed markets. EU would come under increasing pressure to join the fight against “creeping authoritarianism” and Communist central planning.

    It’s also an end to the hopes that China can “wait out Trump” and find itself a more favorable diplomatic situation in 2021.

    The politics simply exacerbates extant USD supply issues. There’s been market chatter dating back to 2016/17 that certain banks were becoming “full up” on xf swap lines to Chinese banks. The window for bond USD issuance opened in 2017-18 but was already begging to close again. On the bond index issues, Rubio has already started looking at this and HK would just be an accelerant to action.

    There’s also no telling what the effect would be on mainland sentiment when billions of Dollars in HK that was believed to be “out” is now becoming engulfed by the CCP and as mainland investors begin to perceive the risk that Xi has put China on an isolationist past. So demand for USD rises.

    Presumably, this all serves to push the RMB significantly lower, which just adds to the impetus to put up trade barriers in some form in Europe and elsewhere.

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