Last week, in “What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse,” we took a look at the potential size of the RMB carry trade, noting that according to BofAML, the unwind could, in the worst case scenario, be somewhere on the order of $1 trillion.
Extrapolating from that and applying Citi’s take on the impact of EM reserve drawdowns on 10Y UST yields (which, incidentally, is based on “Financing US Debt: Is There Enough Money in the World – and at What Cost?“, by John Kitchen and Menzie Chinn from 2011), we noted that potentially, if China were to use its FX reserves to offset the pressure on the yuan from the unwind of the great RMB carry, the effect could be to put more than 200bps of upward pressure on the 10Y yield.
Going farther, we also said that $1 trillion in FX reserve liquidation by the PBoC would essentially negate around 60% of QE3. In other words, China’s persistent FX interventions amount to reverse QE or, as Deutsche Bank calls is “quantitative tightening.”
Now, SocGen is out with a description of China’s “impossible trinity” or “trilemma”. Here’s the critical passage:
This post was published at Zero Hedge on 08/31/2015.