WTF! You Won’t Believe What China Just Did to the Dollar

China sold a record amount of U.S. treasuries in agency debt last quarter, which is actually more confirmation of the monetary tightening story that we've been following all summer. The same one that has led to borrowing from the Fed's repo facility and elevated SOFR rates and all of that. Plus, on the other side, private foreign counterparties are buying huge amounts of, yes, U.S. treasury assets. No treasury rejection there. Instead, both of these things, really the same thing. The market, the world, the monetary system increasingly concerned about the fallout from a globally synchronized flat beverage environment. So while the stock market was taking off to new heights, the summer in the real economy was instead characterized, as we know, by job losses and pessimistic, if not angry, consumers and voters. On the money side, tightness began to show up in a lot of different ways across several separate dimensions, with most of it having to do with market participants understanding the increasingly likely consequences of that flat beverage world. Now we have even more data which adds yet another layer to this monetary story, the all-important collateral layer. The government shutdown didn't just delay the release of labor market reports and the publication of macroeconomic accounts. It also meant treasury was sitting on critical dollar stats that would fill in some of the details about what's taking shape out there in the global euro-dollar shadows. Now that we have those stats shows a couple of surprising developments. So sure, confirmation of monetary tightening, that was expected, but what treasury also showed was by how much and in what ways highlighting the possible role collateral rejection might be playing in everything that we've been talking about. So we've got governments that are selling their treasury reserve assets, monetary mechanics, not geopolitics, plus private foreigners who are buying them back and then some, both of which are different sides of the same euro-dollar tightening coin that we've been following all along, all throughout the summertime. Plus with China selling record amounts, it also partly explains why CNY has managed to stay stable rather than following its Asian peers, the Korean won, Japan yen, much much lower. And all of it pointing to growing risk aversion about a globally synchronized flat beverage environment and the fragility and maybe more cockroaches and everything else, everything seems to be pointing towards. The big signal comes from repo itself, as in volumes. Now these are categorizing the tick data as resales. And a resale in this context is just a U.S. bank lending ledger cash to a foreign counterparty on secured collateral. That collateral, as I'll show you in a minute, can be different kinds, though usually primarily treasury bills. So an American bank does a reverse repo with a foreign entity who is doing the repo. And here in TICC they call the reverse repo a resale for the U.S. bank. I know it gets confusing, but once you get past all the jargon it does make a lot of sense. So what we find over the last 15 years, the post-2008 euro-dollar world, is that resale volume tends to go up as monetary conditions tighten more broadly. And that might seem weird or counterintuitive. I mean, how can monetary conditions be tightening if repo volumes are picking up, which seems to be the opposite? But the answer is repo is being the last resort, the true last resort, not the Fed, after other forms of euro-dollar ledger financing are breaking down. Those that we can't see directly or in any other way than maybe inferring them from the behavior of market signals, like a rising U.S. dollar exchange value, the true shadows, the stuff that's really deep within the black hole. So it might be that FX or currency swap funding is getting to be more difficult and costly, so borrowers are seeking an alternative in repo that we can see arranged with domestic U.S. banks, thus rising resales as other forms of offshore dollar-denominated financing becomes tighter, less elastic, maybe even a touch deflationary. I almost never do ads, and I say no to the vast majority of those that are brought to my attention, but I was thrilled to be able to work with today's video sponsor, Monetary Metals. And the reason is because they're solving a big problem, one that I've been highlighting for a very long period of time. Gold is a safe haven, but other than sitting in a vault, it doesn't do anything. Monetary Metals fixes that. 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In other words, if resale volume really does picture the last resort in conditions across the Eurodollar world, then it was a So that has a total of reported resales at more than 2 trillion, an increase of 378 billion, or a whopping 23% on the year, which compares to 2024's much more modest $44 billion rise, with most of that tightness showing up in July and August of 2024 at the carry trade blow-up. And if you recall, the carry trade blow-up was a recession scare, which here in 2025 is proving to be even more of one heading toward 2026. And it's really a scare in the sense of the implications for this flat beverage system, and what the flat beverage economy might do for the shadow banking world, private credit, the cockroaches, whether or not the NBER ever gets around to saying this is a recession or it's not a recession. Maybe they'll actually wake up and do so in 2032 or something. It's not about the NBER, it's not about their term recession, it's about the real-world monetary implications and financial implications of an economy that is just now starting to show more concrete signs of shedding jobs, which means a lot worse for a lot of risky lending that took place over the last several years. So when we go to the other side of the ledger, so to speak, in this resale environment, to see what the cash borrowers are doing and really what collateral is being used to secure the repos, tick shows there's less T-bill collateral coming back, and that's something important. It may point to a key reason why there is so much tightening in the first place. So we've got a lot more resale volume as the last resort in repo, but also on what appears to be lower quality collateral coming back. Now in the tick data, this is labeled as U.S. bank liabilities of short-term treasury securities. That just means U.S. banks owe treasury bills to foreign counterparties, those counterparties that are borrowing the cash, which is just the other side of the resale. In fact, that's why it's called the resale here. The U.S. bank is reselling the treasury bills. But what that really tells us is that a lot of T-bills are being put up as collateral for these resale transactions that we just went over. But up until March and really February, that was a rising proportion of bills as collateral owed. After March, something changed. That's the key point here. There was still a rising level for resales like we just went over. A lot more cash was being lent offshore, but the collateral coming back to secure the ledger cash was not treasury bills. So that raises a bunch of questions and even a few red flags. On the surface, in purely number terms, that means other forms of collateral have been making up the difference. That could be a good thing, could be positive. Maybe cash owners are feeling more optimistic and are more willing to take lower quality collateral to secure the resale of the repo. Though I think we both know that's likely not the case here in 2025, especially after what happened in March and April. So if we want to speculate a little bit more, what I think it shows is that there are growing difficulties in arranging collateral swaps, which is forcing cash borrowers offshore to directly put up their lower quality collateral with cash lenders onshore. And we always have to keep in mind securities lending and how much this is a huge part of everything that goes on here. This is when whoever wants to fund a position in short-term markets like repo, but doesn't want to pay the higher costs associated with using the risky assets the shadow bank is going to end up buying and holding. Instead, the shadow bank can arrange a swap of those assets for something like treasury bills or notes and then post the bills and notes as collateral when securing the cash in repo, sort of like a three-legged transaction. And the repo cost is less even when you're factoring the spread the shadow bank's going to have to pay to borrow the treasuries. This isn't some weird niche tactic either. It's very common. It's everyday practice and it is enormous. It's a huge central part of everything that goes on in the euro dollar world. In effect, the dealer that's providing the treasuries taking some risk since it's receiving the lower quality assets as its collateral for the swap, which is, yes, a collateral for collateral swap. So you can see where this might become a problem. If the dealer on the collateral swap doesn't like the risky collateral that's going to receive to provide the treasuries, to relend the treasuries, then it would raise the cost of lending treasuries. And maybe, maybe that makes it uneconomical to do the collateral for collateral swap from the perspective of the shadow bank. And this would leave the shadow bank with really only two options. Either post the assets it has directly in repo to get the cash, like we're seeing in tick, or just sell the assets. And no one ever wants to be forced to sell the assets. So it makes sense that this is why we're seeing what we're seeing in the tick data. So collateral providers that are tightening up their own risky positions, that might be why we're seeing more resale volume, which means shadow banks are seeking alternative funding, but don't appear to be able to swap into U.S. treasury bills before having to borrow the cash. So they're posting collateral other than bills, which is likely significantly more expensive, especially when you consider the big differences in haircuts, which is the reason why people want to swap into treasury bills in the first place. Either way, it's effective tightening from collateral first, which would spill over into other parts of funding if indeed this is the case. And of course, as helpful as the tick data is in illuminating some of the euro dollar shadows, even if accidentally, the one thing it specifically avoids is collateral for collateral swaps. That's because the government doesn't really understand what's going on here, why it's going on here, and why it's so important. So treasury instead thinks the only part of this that's important to document is when cash is lent out or borrowed, which is why the tick data doesn't have any information on collateral for collateral swaps. They don't know what it is they're supposed to collect. They don't know how important collateral flow actually is. And in many ways, collateral flow is as important as cash flowing through the system. And in times like this, collateral flow can be even more important. So the implications from the tick data on both sides, lots of resale activity, but not not happening on treasury bill collateral, which suggests maybe there is some tightening up on the collateral securities lending business end of everything that we're talking about. And if that's the case, that would definitely spill over into the rest of the system because it would make everything else even more inelastic, more difficult, and maybe even deflationary. And there are also other parts of tick which show big changes in euro dollar conditions over the past couple of quarters. From a higher level perspective, tick gives us a general idea of changes in total U.S. bank liabilities with respect to offshore money business. It can be a proxy for how willing U.S. banks are to engage in dollar activities. If they're more willing, we'll see sharply expanding liabilities and therefore dollar conditions overall will tend to be more favorable, even reflationary. When they're less willing or more risk averse, we will see bank liabilities slow down and even in some cases actually shrink in reverse. And that's what we have for both the second and now the third quarters of this year. Now this is not a perfect measure by any stretch, but when we see a negative quarter, it's usually something to pay attention to. And in light of everything else that we've been covering where it comes to monetary conditions, this actually makes more sense so we have even more corroboration about risk aversion in very broad terms. Now there was a very sharp increase in liabilities to end last year, which fits along with the artificial high in economic activity across the real global economy. But then you got the dollar shortage which erupted in December, the huge spike in the U.S. dollar exchange value that extended to the early months of 2025 and reversing everything. So bank liabilities in the first quarter were barely positive, so there's already a signal there. Then they turned negative in the second quarter and contrary to the re-risking in stocks and maybe junk credit, banks were increasingly careful in the third quarter showing another small decline in overall liabilities. And again that fits pretty well with what we've seen in the market, including places like the U.S. dollar exchange value which again never crashed, only relaxed a little bit for a couple months before by July embarking on its next leg higher. The repo mess that goes along with it and so on and so on. When you look at all these tick statistics, what they tell you is that the monetary conditions throughout the euro dollar world indeed look to have been increasingly tight through the summer heading into the fourth quarter of this year. All these different ways centered on what looks to be growing issues with repo and collateral. So as I said in the introduction, this is also the background which will lead foreign governments and officials having to sell the reserve assets. In fact, we've gone over this before with other statistics. The one data that I've talked about is, you know, Federal Reserve Bank of New York showing custody of foreign reserve assets, U.S. treasuries, and how those have been disappearing. So tick gives us another perspective on the same thing in the same process, but increasingly broad beyond just what's in custody at New York. It isn't as extreme as the custody data that we've been going over, but it is leaning decisively in that direction, especially in August and September. Foreigners are reporting more treasury sales, which means there are more sales of reserve assets than what the Fed shows in its custody data. Right at the top of the tick list is, as always, China. And everyone gets this wrong too, no surprise since that's where mainstream economics leaves everybody, backwards. What happens is dollar conditions tighten, foreign governments sell their treasuries to raise liquid ledger dollars that they can use to help out their local banks and financial firms that are experiencing the tighter end of euro dollar conditions. It's exactly what reserve assets are for. Instead, what you hear in the media, especially social media, is that China is leading the world in rejecting treasuries, Trump the dollar, whatever it is the narrative requires. But when you actually look at the data and its history, which let's be honest here, no one ever does because it completely blows up the narrative, China will sell its dollar reserve assets during euro dollar cycles when conditions get tighter, just like I told you. It even correlates with the behavior of CNY to a significant extent. Then, when euro dollar conditions grow more favorable, more reflationary, China buys back its reserve assets and the mainstream goes completely silent on the whole selling treasuries thing because it no longer fits. No one ever explains why if the Chinese are ditching the dollar and U.S. treasuries, they spend years at a time buying both. It's not politics, it's always monetary mechanics. But economists in the media have no idea what any of those are, they still think bank reserves from the Fed are the center of everything. So, of course, everyone gets this backward and those who have a narrative to push are able to do so, filling in the vacuum of ignorance that's left behind because of central banks. So, throughout the past couple of years, the Chinese deflationary depression economics, Beijing has, you'll not be surprised to find out, selling its U.S. dollar reserve assets because U.S. dollar providers in the euro dollar system don't want to provide U.S. dollar ledger funds to these increasingly risky real estate busted afflicted Chinese firms. The selling of reserve assets has been intense in a couple of episodes like the third quarter of 2024, the carry trade blow up, as well as the first quarter of 2025, when trade wars, which were centered on the Chinese, appeared to be stirring up some real chaos and real downside potential. But it wasn't really tariffs, it was a weak forgot how to grow global economy threatening to make the Chinese situation even worse. In other words, exactly what's unfolded here in the third quarter as we've been covering over in China. In other words, exactly what has unfolded here in the third quarter as we've been covering. China's economy has taken a turn for the worse, so Beijing has been forced to step up its reserve asset sales and those reached almost 70 billion net according to tick in the third quarter, which was, which is, a record amount. The degree of selling has been focused on not just providing dollars to the It also appears to have had the aim of keeping the yuan's exchange value relatively stable at the same time, though CNY's relative strength may be somewhat related to inflows into the stock bubble that's going on there, certainly during the third quarter. But either way, China doesn't want its increasingly exposed economic weakness and precarious monetary and banking shape to send the yuan plunging all over again, which would amplify all of those growing negatives. So China's selling also shows you what I've been saying about the dollar and dollar conditions this year and the pattern in it. There was a big dollar shortage to start it back in the first quarter, huge selling out of China and the reserve assets. It sent the dollar exchange value soaring, but it only slacked off a little in the second quarter after early April. And then in the third quarter, right back in the thick of it, only in this case, the Chinese have been using the reserve assets to prop up CNY and keep it from following the Korean won, the Japanese yen, the New Zealand and Canadian dollars, etc, etc. But then you have the flip side of all that. So officials are selling, they're forced to sell monetary mechanics, they sell the reserve assets to raise liquid funds, euro dollar deflation and difficulties. Private foreigners, on the other hand, they're buying tons of treasures, they're buying safety and liquidity, depression, economics. Everyone assumes that if whichever government is being forced to sell treasuries by these monetary conditions, that there must be no one else buying them. If whichever government is selling, then that's supposedly treasury rejection. Well, the official sector might be forced to sell, but the private sector isn't necessarily. Now, there are some times when that does happen, like in April, but again, it's monetary conditions, not politics or whatever else the mainstream is trying to sell as a narrative, you know, tariff inflation. Tick also shows that private foreigners continue to buy huge amounts of treasury and agency debt instruments. No rejection here. On the contrary, as I said, demand for safety and liquidity, depression economics all over again, increasing depression economics. So tick for the third quarter, we get record selling out of the Chinese, which fits with the dollar tightening story, but also gives us an idea why CNY has been so stable compared to, say, Japan's yen and Korea's won, even though they're all really in the same Asian euro dollar bucket. It also fits with the rest of tick and further detailing tightening across the euro dollar monetary world. In particular, these hints of collateral difficulties as resale volumes rise, which is itself a negative sign since repo use in this way is more last resort than anything. So the more globally synchronized that flat beverage comes up, not just in the US, the more the financial consequences of it are being considered and the more monetary pullback is to be expected and with tick confirmed. So while the mainstream can't get enough of Casey Jeff and his tariff inflation band at the Fed, this is the stuff of more Pringles, either directly in terms of what's going on in the repo market and the repo mess, or the consequences as they spill out further and further into the flat beverage economy. Either way, forgot how to grow is remembering to do worse. And in this case, remembering to do worse, not just in terms of labor market and hiring, even some firing, but also in terms of more and more serious deflationary conditions up to and including potentially collateral. I did go over what's going on in the onshore repo market in the video link below. So as always, thank you very much for joining me hope everyone had a happy Thanksgiving. Check out your university's Black Friday sale. There's a link in the description for that. Huge thanks to your university members and subscribers and until next time, take care