zerohedge.com / by Tyler Durden / 09/21/2015 08:14 -0400
Last week, we updated our assessment of capital outflows in China, noting that based on available information, it appears that outflows may have surpassed $300 billion from early July through mid-September. That figure comes from our analysis of July TIC data, Goldman’s assessment of underlying currency demand (comprised of outright spot plus freshly-entered forward contracts), and Nomura’s estimates for onshore spot intervention and offshore spot and forward meddling by the PBoC in September.
As we began to detail late last year when falling crude began to pressure the accumulated petrodollar reserves of the world’s energy exporters, and as we and finally countless others have discussed in the wake of China’s shift to a new currency regime, FX reserve drawdowns serve to tighten global liquidity and work at cross purposes with DM QE. This creates a dilemma for Fed policy as hiking rates could accelerate outflows from emerging markets thus putting further pressure on already falling USD reserves. In other words, in today’s world, a 25 bps hike by the FOMC would be amplified and transformed into something much larger once it reverberates throughout the global financial system.
Assessing how large the cumulative outflow from China may end up being is important as it proxies for the expected drain on global liquidity (or at least part of the drain on global liquidity, as we must also consider the possibility that net petrodollar exports turn deeply negative in the face “lower for longer” crude). Previously, we suggested that outflows could eventually reach $1.1 trillion. That figure was derived from a look at BofAML’s assessment of the size of the RMB carry trade, which is now unwinding.
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