Beijing orders state banks to get ready for massive dollar dump

China has told state-run financial institutions to prepare to sell off their dollar holdings while stocking up on offshore yuan, as Beijing tries to bolster the national currency, Reuters reported on Thursday, citing sources with knowledge of the matter.

The simultaneous dumping of the US dollar and purchasing of the yuan are expected to avoid further drops in the Chinese currency, which is currently on track for the biggest annual loss versus the greenback in nearly three decades. So far this year, the yuan has dropped over 11% against the dollar.

The unnamed source told the agency that the scale of this round of dollar selling to defend the weakening yuan is expected to be “rather big.”

China’s offshore yuan, which moves in lockstep with onshore yuan, saw a rebound of around 200 pips on the news. The trading volumes of offshore yuan account for about 70% of all yuan FX trades globally, dwarfing the volumes traded on the mainland.

The intervention scheme reportedly involved primarily using state lenders’ dollar reserves, while the total amount of selling is yet to be determined, since moves in the Chinese currency typically depend on dollar movements and the tightening policies pursued by the US central bank.

In 2015, the Chinese authorities burned through $1 trillion of its official FX reserves to support the yuan after a one-off devaluation of 2%, which roiled global financial markets.

Earlier this week, Beijing ordered China’s local banks to revive a yuan fixing tool that was abandoned two years ago, as the monetary authorities tried to steer and defend the weakening currency.

Nordstream and Escalation

As we were pondering these developments on the ground, yet another plotline emerged underwater. The first hint that something was amiss was the news that pressure in the Nordstream 1 pipeline was dropping mysteriously. It was then revealed that the pipeline – along with the non-operational Nordstream 2 – had suffered serious damage. Swedish seismologists recorded explosions on the floor of the Baltic Sea, and it was revealed that the pipelines are heavily damaged.

Let’s be frank about this. Russia did not blow up its own pipelines, and it is ludicrous to suggest that they did. The importance of the pipeline to Russia lay in the fact that it could be switched on and off, providing a mechanism for leverage and negotiation vis a vis Germany. In the classic carrot and stick formulation, one cannot move the donkey if the carrot is blown up. The *only* feasible scenario in which Russia might be responsible for the sabotage would be if some hardliner faction within the Russian government felt that Putin was moving too slowly, and wanted to force an escalation. This would imply, however, that Putin is losing internal control, and there is no evidence whatsoever for such a theory.

And so, we return to elementary analysis, and ask: Cui bono? Who benefits? Well, considering Poland celebrated the opening of a new pipeline to Norway only a few days ago, and a certain former Polish MP cryptically thanked the United States on Twitter, it is fair to make a few guesses.

 

The first lesson of doing crimes is not to brag about it on twitter

Let us briefly meditate on the actual implications of Nordstream’s demise.

  1. Germany loses what little autonomy and flexibility it had, making it even more dependent on the United States.
  2. Russia loses a point of leverage over Europe, reducing the inducements to negotiation.
  3. Poland and Ukraine become even more critical transit hubs for gas.

Russia clearly perceives this as a bridge burning move of sabotage by NATO, designed to back them into a corner. The Russian government has decried it as an act of “international terrorism” and argued that the explosions occurred in areas “controlled by NATO” – the concatenation of these statements is that they blame NATO for an act of terrorism, without explicitly saying that. This precipitated another meeting of the Russian National Security Council.

Many western nations have advised their citizens to leave Russia immediately, suggesting they are worried about escalation (this coincides with Ukraine’s unhinged claim that Russia may be about to use nuclear weapons). For the time being, I expect Russian escalation to remain confined to Ukraine itself, likely coinciding with the deployment of additional Russian ground forces. If Russia feels compelled to undertake an out of theater escalation, targeting American satellites, digital infrastructure, or forces in Syria remain the most likely option.

On the Precipice

I am fully cognizant that my views will be spun as “coping” after Ukraine’s gains in Kharkov oblast, but time will tell out. Ukraine is on its last legs – they drained everything usable out of NATO stockpiles to build up a first tier force over the summer, and that force has been mauled and degraded beyond repair just as Russia’s force generation is set to massively increase. Winter will bring not only the eclipse of the Ukrainian army, the destruction of vital infrastructure, and the loss of new territory and population centers, but also a severe economic crisis in Europe. In the end, the United States will be left to rule over a deindustrialized and degraded Europe, and a rump Ukrainian trashcanistan sequestered west of the Dnieper.

For now, though, we are in the interregnum as the last flames of Ukraine’s fighting power flickers out. Then there will be an operational pause, and then a Russian winter offensive. There will be several weeks where nothing happens, and then everything will happen.

During that operational pause, you may be tempted to ask – “is it done, Yuri?”

No, Comrade Premiere. It has only begun.

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