China's Record Dumping Of US Treasuries Leaves Goldman Speechless

The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.

In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

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.

Finally, if China's selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

Or let us paraphrase: how soon until QE 4?

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