donderdag 21 november 2013

People's Bank of China Stops Supporting U.S. Debt

One of the more interesting stories this week has been reported by Bloomberg. The People's Bank of China is said to stop increasing its foreign currency reserves. What implications will this have? I believe that we'll see the start of a U.S. dollar collapse.

Look what Peter has to say about this:

Chart 1: PBOC Balance Sheet
All these years, the Chinese bank had increased their balance sheet up to $3.66 trillion of which $1.3 trillion are U.S. treasuries (Chart 1). This is almost half of the PBOC's balance sheet. Other assets include U.S. agencies, U.S. corporate debt, U.S. equities and other non-U.S. assets (Chart 2).

Chart 2: PBOC's U.S. Asset Composition

If the PBOC is going to stop the purchases of foreign currency reserves, this means that they will stop buying the assets above and mainly stop buying U.S. treasuries. That's what it all comes down to. This also means that their excess of U.S. dollars will need to be converted to other assets like the yuan, or even gold. In fact, one of the ideas of China is to prepare the yuan as a reserve currency and I believe this is a first step in that direction. We know that China has amassed a lot of gold, when considering the amount of gold imports from Hong Kong. I believe the PBOC should have added significantly to its gold positions since 2009. The PBOC hasn't reported their gold holdings since 2009 but it is said that they own around 4000 tonnes of gold right now. Needless to say this will be very bullish for the yuan going forward. If we take a look at the chart of the USD/CNY exchange rate we see that the yuan has already increased a lot. I believe the yuan will continue its ascent. To bank on this trend, investors can buy the WisdomTree Dreyfus Chinese Yuan Fd ETF (CYB).

Chart 3: USD/CNY

To read on, go here.

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