China Dumps $200 Billion Worth Of US Stocks

Petrodollars is the term used to describe the excess of oil revenue accrued by petrol-producing economies.

This is often more than is needed to invest in domestic infrastructure and public services, and so there is normally a large flow of outward investment into things like bonds, stocks, and liquid assets.

This article will explain the recent shift in this trend, and the reasons behind it.

OPEC – They’ve got oil, and then some

Firstly, OPEC is the name of the loose union of the largest oil-producing countries in the world, who collectively account for 40% of the world’s oil supplies.

They are Iran, Iraq, Saudi Arabia, Qatar, Kuwait, the United Arab Emirates from the Middle East region; Algeria, Angola, Libya and Nigeria from Africa; Ecuador and Venezuela from South America.

Twelve members in total.

Even outside of this group, there is a long trend of oil-producing economies being by far net exporters of capital, meaning they import and purchase more capital than they export.

One of the most significant of these is US treasuries: these are financial instruments that the US government sells, often abroad, to help finance its large debt.

The Oil Crash of 2015

The following graph shows the crash in oil in the space of less than a year, essentially halving:

Price wars between Saudi Arabia and Russia had something to do with it, but the legalization of fracking in the US in 2005 has helped domestic oil production boom, decreasing the price.

OPEC countries followed suit to compete but didn’t reduce production.

The US being the largest oil producer in the world makes it integral to the world market.

It was inevitable that reduced demand from them would drastically decrease the price of global crude oil.

OPEC countries and Russia had no choice, with the price at least.

While refusing to reduce production, as the OPEC countries did, seems to fly in the face of rationality, it was a reluctance to lose market share that made them do this.

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Oil prices and their effect on petrodollars

The above graph shows the relationship, almost perfectly correlative, between global oil prices and petrodollar flows (the outward investment from oil-producing economies).

This has often been underestimated, but the most recent and most drastic fall has forced everyone to pay attention.

Goldman Sachs gave some hard figures:

• Capital outflows from emerging economies that are designated as ‘oil-producing’, be it OPEC or not, saw an average of over $300 billion each year, from 2006 – 2014
• This is an astounding 0.5% of global GDP
• With the drastic fall in oil prices experienced in 2015 the capital outflows of said economies shifted and reversed, expectedly

More than just OPEC, though

However, it took more than these falling oil prices or Saudi Arabia’s efforts to deal with its central bank bust that averted everyone’s attention to this.

China’s devaluation completely frightened the market.

Some might even say they were spooked.

Everyone realized that China tapping its reserves was not simply a method of propping up the yuan and preventing outflows in isolation of global trends.

Both China and OPEC were selling reserves and spending their small change saved for harder times.

In an era obsessed with quantitative easing, the opposite was happening.

We now found ourselves in an era of quantitative tightening.

The task for analysts is to assess this regarding the relationship between the activities of emerging market oil producers and China on the one hand and developed Europe, the USA and Japan on the other.

The former group is selling, and selling fast.

Partly to protect against capital flight, and partly to protect against falling commodity (oil) prices.

Would quantitative easing on the part of the latter group be just maintaining the status quo?

A strange situation that would be.

Quantitative easing is normally intended to stimulate economies and ensure liquidity for transactions.

Hence everyone’s obsession with it in the period following the financial crash in 2008.

Then, the entire world was experiencing stagnant growth and needed injections of liquidity and confidence to kick-start a recovery.

Now, it seems like papering over the cracks of a failing market.

Mmmm, juicy capital flows

The graph below shows the activities of national central banks in purchasing assets from 2009 to 2015.

The Acronyms are as follows, for ease of understanding:

• EM: Emerging Markets
• BoJ: Bank of Japan
• BoE: Bank of England
• SNB: Swiss National Bank
• Fed: Federal Reserve (United States’ Central Bank)
• ECB: European Central Bank

Flows out of these emerging market economies more than eclipsed the stimulus of both the ECB and Bank of Japan programs.

The asset purchases of global central banks turned negative!

Government bonds are the classic target and bedrock of this activity.

Regarding US debt bonds, China sold in one month what the Saudi Treasury owns in its entirety: a figure of $117 billion, much lower than many people expected of the Saudis.

This is, of course, the official figure, and there could be billions upon billions found in secretive offshore bank accounts.

The Panama Papers leak earlier this year could prove to shed some light on this area, however until then we must rely on official government figures to elucidate the situation.

Though bonds are the classic and most popular target to buy and sell, stocks are significant too, and there has been much selling off of these by China as well as bonds.

Latest figures tell us that China sold almost $150 billion in US stocks in the last 13 months.

This represented a whopping 42% of their total holdings.

Talk about a fire sale.

The graph below shows this drastic drop off very clearly.

You could abseil down that incline.

There was a clear, steady increase and targeted policy at accruing US equities through the years 2009 to 2015.

Irrespective of market fragility and slow growth, China was buying and buying.

Come the oil price crash of 2015 and this has all changed.

China’s US portfolio       

When analyzing China’s holdings in US-based assets, one needs to think outside of treasuries (government debt bonds).

A source at the Council on Foreign Relations, Andrew Setser, told Bloomberg, to evaluate Chinese activity in the global markets ‘one needs to look beyond simple treasuries and at the wider market.’

The People’s Bank of China, China’s central bank, reverted to selling stocks to help retain treasuries that are easily movable and transferrable.

This means that in a time of turmoil, they can easily offload them.

Hence why they call them liquid assets.

And the yuan has declined twice in the last year.

While it hasn’t been an overly sharp decline, it has caused a myriad of market volatility worldwide and hit investor confidence.

When investors are worried, they become nosey.

And acting on this nosiness, they obsessively monitor reserves owned by China.

They do this to gauge how much of the country’s war kitty is being chucked out the window in order to combat capital flight, which is a prevalent risk.

S&P 500: sort it out!

Another reason that selling stocks and equities could prove China wise beyond its years is its weak performance among the S&P 500 index.

It has not seen an end of day new high in a year.

Beginning in 2009, China decided to double its holdings in the US Stock market.

As shown in the graph before, this policy has reversed.

Its recent decision to sell countless stocks and equities is mirrored by other nations reacting to the crude crash in the same way.

Qatar, the UAE, and Russia’s sovereign funds have all been switching from equities to more liquid assets ever since the global price of crude oil began tumbling in 2014 (though 2015 was more significant).

Interesting to note is that the selling flurry that we have witnessed coincided with the People Bank of China devaluing the yuan.

Look at that drop-off.

What about the ‘Asian Oil Exporters’?

The US Government uses this term to describe Bahrain, Qatar, the UAE, Kuwait, Oman, Iraq, Iran and Saudi Arabia (can’t forget them).

The following graphic details their sell off policies:

Collectively, they sold off some $53 billion in US equity holdings, representing about 16% of the total.

This came after late 2014 when Saudi Arabia decided to lower its pricing to compete with fracking and other domestic energy-producing methods developed by the US and Europe.

Final Word

So to sum up, OPEC and China have collectively sold off $200 billion worth of US-based equities since 2014.

It’s clear that when it comes to stocks and investing, domestic markets are no longer that.

Every nation is connected, and the global market is the only one of any relevance.

Politics are also a significant factor that one has to take into account when assessing the global outlook.

Be it Saudi Arabia’s threat to sell a quarter of a trillion assets if Congress legislated that their officials may be held accountable for roles in 9/11 in court, or China’s veiled threats in retaliation for punishment for actions in the South China Sea, expect sell-offs to be a common thing of the future.