China is making a dangerous gamble Against the US dollar the currency Crisis has gotten worse for them and They are dumping dollars but not in the Way that you think so if we take a look At the Yuan to the dollar he has been Falling non-stop ever since the Federal Reserve started hiking rates the Yuan Has crashed by almost 12 percent year to Date and it is near record lows and to Counter this slide China told Dr State Banks to prepare for a huge dollar dump But they are not dumping Dr dollar Reserves like Japan China is borrowing Dollars from the future and selling them Today and in the report China State Banks were seen acquiring dollars in the Swap market and then turning around and Selling those dollars in the sport Market to help stabilize the Yuan now This is very different from selling the Dollar stockpiles in their reserves so What China is doing is in two parts now The first part is a currency swap so the State-owned banks are going out into the Open market and exchanging Chinese Yuan For US Dollars Today promising to repay Those same US dollars in the future for Chinese Yuan down the road so for Example I'm a Chinese bank and I want Dollars your European bank and you want Yuan so I give you 100 Yuan for your 10 Today and one year later we swap back The currencies I give you back 10 US
Dollars plus interest and you give me Back 100 Yuan plus interest and the Second part is simple China is taking This bunch of new dollars and selling Them in the spot Market to save the Yuan And according to a source the banks want To acquire dollar positions from the Swap markets to supply the spot market And they are doing this so that there Are three trillion dollar Forex reserves Won't be tapped for intervention but Remember the dollars will have to be Repaid back down the road in this Currency swap now this is a huge gamble For the Chinese State Banks because it Opens them up to a very big currency Risk down the road China is betting that The dollar will be weakered down the Line line and the Yuan will be stronger They are betting that this currency swap Will work out in their favor because if It doesn't it opens up China's Banks to Huge losses or even a banking crisis and This could mean that the Yuan could Devalue even further forcing China to Deplete their reserves for direct Intervention and this is a consequence Of the US dollar shortage getting out of Hand and China trying to stabilize their Currency with a huge Forex currency bet So this strategy begs the question why Doesn't China use their stockpiles of US Dollars now China has the world's Biggest Forex Reserves at over 3.25
Trillion dollars back in 2021 but they Have taken the hit down to just three Trillion dollars thanks to the dollar Strengthening and this happened just Within the last eight or nine months and Here's the big dilemma China and other Countries face they just aren't enough Dollars to go around doing this currency Crisis and because of this China is not Directly using their reserves to defend Their you want at least for now and the Reason is simple the whole world is Going through recession and spending Worldwide is already crittering it's Gonna drop even further and according to Bloomberg China's Trade Surplus fell by 22 billion dollars in August and this Drop was led by weaker export growth as The world is cutting back on spending Amid soaring inflation China is the World's largest exporter of Finnish Goods we all know that they are the World's Factory but to make all these Goods they also need to import tons of Raw materials and commodities and we Know what Commodities are priced in U.S Dollars and we can see that China Imports around 235 billion dollars of Goods every single month and because the World Trade is done million dollars they Need to hold on to their reserves to Import staff in an emergency so even as China is pursuing the dollarization There's still this short-term reality
That they have to juggle if they burn Through their dollar reserves now to Defend the Yuan and if a global Recession hits they will be in deep Trouble a global recession means all of Their customers no longer have money to Buy Chinese Goods everyone will just be Too broke but China is a huge population That still needs food and fuel and that Is why they are not burning through Their dollar reserves just yet they know This economic crisis could get much Worse so they are borrowing money from The future to bet against the dollar and Save the Yuan today this is a move that Will help preserve Dr currency reserves But it is also a risky bet and let's Quickly answer the question why China Has to protect their currency now many People correctly pointed out that a Weaker Yuan should help China sell more Stuff and that is true but there comes a Point in time when the Yuan gets so weak That it can Spike inflation higher like What we are seeing in many countries Today we can see that the stronger Dollars collapsing currencies worldwide The Japanese Yen has crashed by over 20 Percent and British pound is also Crashing down all the way to parity with The dollar China is also a victim of this currency Crisis losing 12 percent of its value Against the dollar and as you will
Quickly see China's very few options to Defend the Yuan now the first strategy Is selling off their Forex reserves but As we pointed out not all countries can Do that because the appreciating dollar Is making trade harder and harder Especially for emerging markets Including China and we can see that the Terms of trade for the United States has Swung dramatically in their favor Especially in 2022 as the dollar Continues to get stronger and this just Means that the United States can import More goods for every unit of exports That they sell and the converse is true China for example is paying more for Imports because the majority of their Raw materials are Commodities they are Priced in US Dollars while a good Portion of their goods is sold locally In Yuan so as the dollar strengthens and The Yuan weakens they are digging Themselves deeper into a whole more Dollars are already leaving the country Now even the IMF is warning countries to Preserve their vital foreign reserves to Deal with potentially worse outflows and Thermals in the future and it's for one Very simple reason you just can't print U.S dollars like the Federal Reserve Your dollar assets are limited remember The Federal Reserve is going to keep Hiking rates up to destroy demand Globally to bring down the demand for
Oil in order to crush inflation and as Power keeps hiking rates this is hurting The investor sentiment in China right Now a lot of investors are flying away From China and one obvious reason is Because of the plunging Yuan and the Currency risk that investors are willing To take now if you take a look at the Fat funds rate we can see he has gone Above China's own Benchmark rate of Around two percent and this is bad news Because investors will run towards the Dollar because firstly the currency is Strengthening against the Yuan and U.S Bonds are now actually yielding more Than Chinese bonds so there's a threat Of further Capital flight out of China And you might be wondering why doesn't China just raise their interest rates After all central banks around the world The hiking rates to counter the fed and This is where China's options are really Limited and it's all because of their Real estate crisis now every monkey Today knows that China is a big real Estate problem and people are afraid of Buying Chinese property and we can see For 12 months straight property prices Have been crashing and what does this Mean new buyers are reluctant to come in And developers are hesitant to build new Projects and this means China cannot Afford to raise interest rates they will Scare away any remaining buyers and
Developers and their realistic sector Will collapse in fact the Chinese Government is slashing interest rates For first-time buyers reducing them by 15 basis points so for first-time home Buyers your five-year and Below interest Rate is all only at 2.6 percent that is One of the lowest rates in the world so While the world's hiking rates up China's slashing rates down because They're trying to protect their property Market the air is coming out of the Bubble and China is trying to prevent it From popping and this is one of the big Reasons why there are options to Intervene and see if the Yuan are truly Limited it is not that China doesn't Want to hike rates is because they Seriously can't afford to so China has No choice but to bet big this currency Swap strategy they need to protect the Value of the Yuan because if it goes too Low investors will flee the country and Their local inflation was sore now China's inflation rate is rather low Compared to the rest of the world at Just 2.8 percent but this is the 24 Month High and the big increase is Coming from food prices and this is when Local demanding China is being Controlled thanks to the lockdowns when You are stuck at home you can't go Around spending right and this is Helping to keep a cap on prices for now
And in this recent speech at the 20th Party Congress president XI is doubling Down on his lockdown policy and this is Going to continue to suppress demand in Their economy now I believe the fate of The lockdowns goes hand in hand with the Value of the Chinese Yuan if the Lockdowns end and the yuan is still Crashing this will cause local inflation To get out of hand it won't be a good Look for them but here's the big Question will China strategy to dump the Dollar's work and to be honest is Becoming more of a coin flip today there Are two opposing forces in the market They are fighting it out many countries Are selling Dr dollars to protect their Currencies but others are buying dollars To increase their Forex reserves we have World currency reserves already Shrinking by one trillion dollars in a Record drawdown China is betting that More countries will be dumping dollars Than those buying and let's take Japan For example the Japanese Central Bank Has been aggressively set selling their Dollars to protect the Yen they have Been depleting their results like no Tomorrow selling a record 54 billion yen In September alone bringing Dr reserves To 2017 lows but on the other hand we Have investors leaving Japan and selling Off their Yen denominated assets we can See a huge Exodus of money leaving
Japanese Bonds in September alone Global Funds have dumped over 6 trillion yen Worth of jgbs and guess where that money Is going into it's either sitting a US Dollar cash or flowing into treasuries Japanese funds are actually running back To treasuries buying half a trillion yen Worth of U.S bonds so there's this epic Talk of war between sellers of US dollar Cash and assets and the people who are Buying for safety and to earn some yield And China is making a very brave bet Because it can swing either way and I Don't have a crystal ball and there are A lot of dangerous events coming up in The next few months they could flip Things in China's favor or against it For example Winters coming for Europe And they're going to hike rates but also Print money to subsidize their energy Costs with the UK and Eurozone start Selling more US dollars to defend their Currency or will the world suddenly rush Back into the dollar as a fear trade and Make the currency crisis even worse now In the short term it is very possible For the dollar to keep getting stronger As the rest of the world economy crashes In fact I'm counting on it but it will Come a turning point it can't go on Forever or else one US dollar will equal 100 euros right and every foreign Currency in the world will get Hyperinflated away against the dollar
But countries are going to learn from This pain we are going to move towards a Future of multiple Reserve currencies And more bilateral trade nations are Going to start diversifying away their Currency risk and for China's case if There are bad wins they get to protect Their currency reserves and they can Slow let their property bubble deflate Without hiking rates however if they are Bad fails then their Banks might face Horrible losses and the Chinese Central Bank might have no choice but to drain Their 3 trillion dollar reserves to Directly defend the Yuan so let me know What you think will China's big currency Bad workout in their favor or will the Tides turn against them let me know in The comments below stay safe be sure to Smash the like button and subscribe as We navigate through this insane times
