There were two dogs that did not bark this year. There are the Japanese yen, which despite negative interest rates and an unprecedented expansion of the central bank’s balance sheet, the yen has strengthened 15% against the dollar. The yen has been the strongest major currency, and the third strongest currency in the world behind the high-yielding Brazilian real, recovering from last year’s drop, and the Russian rouble, aided by a rebound in oil.  

The other dog that is not barking is the China. In August 2015, and again at the start of is year, the decline of the yuan and weakness in Chinese equities reverberated around the world. It was even cited as a factor influencing the timing of the Fed removing accommodation. Since early this year, the yuan has continued to depreciate, and Chinese shares are among the worst performers. Yet it has not been a disruptive force.  

The Shanghai Composite has fallen 11.5% this year.  MSCI Emerging Market Index has gained about 14%. MSCI Asia-Pacific Index has advanced roughly 6% this year. MSCI’s World Index (developed markets) is about 4% higher on the year.  

China’s reserves have fallen by about $134 bln in the first nine months of the year. This understates the capital outflow as China also recorded a $134 bln current account surplus in H1 16 and a trade surplus of $146 bln in Q3.  Brad Sester of the Council on Foreign Relations, estimates that China may have experienced outflows of $95-$100 bln in Q3.  As China sells reserves, it is selling US Treasuries. The latest country breakdown covers the month of August.  US data, which is not necessarily comprehensive, estimates that China sold $33.7 bln of Treasury Securities in August after selling a combined $25.2 bln in June and July.  

Without complicating the picture by attributing Belgium’s activity to China (as some want to do since China may use clearer and custodian there), US data shows China having divested US Treasuries in six of the first eight months of the year.  In the past, and occasionally still, one can read pundits claiming US dependence on China funding its deficit. Sales of Treasuries has not prevented a decline in US yields this year. The 10-year yield finished last year near 2.27%. Today it is 50 bp lower.