While some are shocked that China may have “used” a huge amount of “reserves” in November, that is only because so many myths and anachronisms continue to abound in the mainstream and beyond. Any conversation about forex in the context of central banks and national government agencies is one that still views money from a traditional standpoint – as if these places have piles of currency sitting in a vault or in some kind of standard deposit account. Even where securities are recognized as the mainstay of that accumulation, it still seems to reckon some kind of sentimentalist pursuit.

For one, we have no idea to what China’s “reserves” actually belong; they don’t report much information and what we do have on this end is often quite incomplete. The TIC figures, for example, which show China’s domestic holdings in one sense don’t align with the dramatic swings in Belgium. Belgium is notable for many reasons but particularly the home location of Euroclear which is Europe’s primary derivatives clearinghouse (eurodollar primary among the “products” offered such clearing). Thus, if China’s holdings of UST’s diminish in Belgium then it isn’t at all obvious that they are “selling UST’s”; in fact, contrarily, it is far more likely that they are posting collateral for forward transactions, swaps and the like.

To the mainstream, that cannot be taken into account for the orthodox view of global “money” and the dollar as some kind of formal reserve system. In fact, the dollar never truly gained reserve status, as even by 1971 the eurodollar and a credit-based reserve currency system had already superseded it. Those two words are the most important in monetary context since gold, and yet it is treated as if it is not the case.

When China reported a great reduction in its “capital outflows” for October, almost everyone was quick to declare an end to the irregularity. Not accounting for what the PBOC was likely doing in the wholesale arena, the credit-based reserve system, made for such ill-suited interpretation. From this perspective, the renewed problems in November are not surprising but simple math – there is only so much that can be done even in the short run to “hide” “dollar” problems.

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