Demand for Dollars is High: Chinese Banks Running Out

Mish

The major Chinese commercial banks once had more dollar assets than liabilities. Not anymore.

Chinese banks now owe more dollars than they are owed. In short, China’s Banks Are Running Out of Dollars.

The combined dollar liabilities at the big four commercial banks exceeded their dollar assets at the end of 2018, their annual results show—a sharp reversal from just a few years ago. Back in 2013, the four together had around $125 billion more dollar assets than liabilities, but now they owe more dollars to creditors and customers than are owed to them.

Bank of China is by far the greatest contributor to the shift. Once the holder of more net assets in dollars than any other Chinese lender, it ended 2018 owing about $70 billion more in dollar liabilities than it booked in dollar assets. The other three lenders actually finished the year with more dollar assets than liabilities, though Industrial & Commercial Bank of China IDCBY -3.24% had a deficit at the end of 2017.

No Trust in the Yuan

The Chinese banks are covered by the Bank of China (China's central Bank), currency swaps, and off balance sheet funding.

The Bank of China has over $3 trillion in reserves, so the current liability looks small in comparison.

But this masks the true state of affairs: There is no global trust in the yuan and the Eurozone is a basket case.

Spain Needs Another Bailout

Note that Spain Seeks Another Bailout as Deficit Skyrockets.

Very Deflationary Outcome Has Begun

A Very Deflationary Outcome Has Begun: Blame the Fed

Yet, Hyperinflationists Come Out of the Woodwork Again.

This is all too familiar, and amusing.

For further discussion, please see Inflation or Deflation? Collapse in Demand Trumps Supply Shocks

Mish

Comments (45)
No. 1-14
AbeFroman
AbeFroman

Slightly topic-adjacent, but are governments looking at cryptos as a capital flight risk?

BrainDamagedBiden
BrainDamagedBiden

China is in for a very hard landing, or is it?

They are the one that make all the stuff. Do they need the US to buy the stuff? What if they bought their own stuff?

They are a totalitarian regime. The CCP can scrape the assets/liabilities ledger and throw it in the wastebasket. They can then have people back in the factories producing goods for the Chinese under a new monetary regime. The US will have a shortage of goods and stagflation.

BrainDamagedBiden
BrainDamagedBiden

The inflation/deflation debate is silly since it all depends on how the government/Fed behaves. Obvious we are in a huge debt deflation caused by irresponsible lending and Fed policies. Whether we have deflation or inflation depends on the degree of counterfeiting. Of course, counterfeiting solves nothing. It just shifts the cost of bad decisions onto the backs of the forgotten man.

tokidoki
tokidoki

For the world to use the Yuan, either there has to be a war where the US is defeated OR the US implodes on its own.

Also supposedly the Chinese holds a ton of Gold.

BrainDamagedBiden
BrainDamagedBiden

Interesting interview with Lacy Hunt. His explanation for why deflation instead of inflation is that our wise leaders would not print so much as to cause inflation, because, that is too damaging. My only question is: if our leaders are so wise, how did we get here?

Tony Bennett
Tony Bennett

"Demand for Dollars is High: Chinese Banks Running Out"

...

The Federal Reserve Bank has standing currency swap arrangements with central banks of Japan, Canada, Switzerland, England and the ECB.

Back in March Federal Reserve announced temporary arrangements with central banks of Australia, Brazil, South Korea, Denmark, Norway, New Zealand, Sweden, Mexico, and Singapore.

Are we missing anyone?? ....

michiganmoon
michiganmoon

Would the fact that there is debt saturation across the board at all levels of US society be deflationary? People/corporations/city and state governments can't afford to take on as much new debt. Some of the old debt will be defaulted on.

Look at housing. There will be less buyers as people are debt saturated, wanting to build up an emergency savings, taking pay cuts, and are worried about the future. Moreover, there will be some foreclosures. Demand to buy should drop and supply of homes for sale might increase at the same time. Home prices should drop - I would think.

Tony Bennett
Tony Bennett

"The Bank of China has over $3 trillion in reserves, so the current liability looks small in comparison."

...

WAS $4 trillion

WITH trade surpluses

Now? With trading partners reeling? And a huge mountain of domestic (bad) debt that needs to be papered over at SOME point?

Put me down for a massive yuan devaluation (internal) in the cards ... if not, as foreign reserves bleed lower ... a run on currency (external).

Jdog1
Jdog1

Mish, how much of this do you think is being caused by dollar based loans defaulting?

Six000mileyear
Six000mileyear

If the Bank of China has a net USD liability, then too whom? Western countries with natural resources? Did the Chinese try to keep raw material and energy prices down by purchasing very long-dated futures on margin?

ColoradoAccountant
ColoradoAccountant

Deflation. No matter how much money the Fed stuffs into the banking system it has no velocity. People are not rushing out to buy Gucci bags before the price goes up.

ColoradoAccountant
ColoradoAccountant

When I was growing up dollar bills said Silver Certificate where they now say Federal Reserve Note. There are 3 metals that are highly conductive of electricity. Gold, Silver, and Copper. The best one is Gold because it does not corrode. No one wires their house with Gold. A tad too expensive. Forget the ads, it is not a stupid rock.

frozeninthenorth
frozeninthenorth

Mish you are correct that demand for dollars is rising in China but its really not a surprise, because another issue is that Chinese companies have substantial US dollar obligations. There has already been a lot of discussions (by the money supply people) about the likely shortage of US dollars in China, and that the solution for the BoC is to sell US Treasuries to get USDs.


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