Tag Archives: sovereign debt

China Cuts Its Holdings Of U.S. Treasuries–Or Not So Much

China cut its net holdings of U.S. Treasuries by 12% in the second half of last year, more than twice as much as previously reported, according to the preliminary annual revision of the U.S.’s monthly Treasury International Capital (TIC) report. And it probably doesn’t mean anything much beyond what we already know.

The new TIC report on major foreign holders of U.S. Treasury securities shows that China’s holdings fell from $1.31 trillion last July to $1.15 trillion in December, with a sharp net sell-off coming in that last month. The TIC monthly numbers had shown a fall from$1.17 trillion to $1.1 trillion over the same period. The annual revisions are considered more accurate than the monthly numbers. They take into account the true origin of buying done through third countries. A new series of monthly numbers introduced in January this year will narrow the accuracy gap, though not close it. (U.S. Treasury note on all this here.)

China buys a lot of U.S. Treasuries through London, and, to a lesser extent other popular custodial centers such as Luxembourg, Belgium, Switzerland and the Caribbean. Once this is taken into consideration, the preliminary June baseline number for its holdings increased to $1.31 trillion from $1.17 trillion. Hence the doubling of the percentage net sell-off in the second half of last year.

A year-on-year comparison paints a different picture: China’s holdings at $1.15 in December 2011 were down less than 1% from $1.16 trillion a year earlier, and might have been higher had there not been a heavy sell off in December last year from November’s holdings of $1.25 trillion. China typically reduces its Treasuries holdings towards the end of a year.

The numbers for the second half of last year were always likely to be closely watched. The political kerfuffle in Washington over the debt ceiling during the autumn put the U.S.’s AAA-credit rating at risk. Also, overseas investors generally were buying higher-yielding U.S. mortgage securities ahead of what was expected to be a further round of quantitative easing by the U.S. Federal Reserve.

There are other factors consistent with a long-term fall in China’s Treasuries holdings, among them a shrinking trade surplus and the gradual rise in the yuan against the dollar. This time round, Beijing has also likely been buying euro-denominated sovereign debt, both to diversify it holdings further (which it has been doing for some time) at fire-sale prices, and to provide some political backstopping for Europe during the euro-debt crisis. The State Administration of Foreign Exchange (SAFE), which manages the country’s foreign exchange reserves, is also pursuing equity investment and a little buying of gold and more of other commodities. When you are sitting on $3.2 trillion in reserves, you have to chase a little yield. The Wall Street Journal calculates that the share of China’s reserves in U.S. securities has fallen to a decade-low 54%.

While SAFE  hasn’t been putting all the extra foreign-exchange reserves that China has been taking in into U.S. dollar denominated assets for a while, more recently, the U.S. Federal Reserve has been buying long-term Treasury bonds as part of its easing program, Operation Twist, as the putative QE3 became. Americans who bleated about their country being in hock to the Chinese, can now bleat about being in hock to their own Federal Reserve–for some an even greater evil. For the rest, China still owns more than $1 trillion of American sovereign debt to get het up about. Nor does China have too many other places to put it.

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A Disdainful View From Beijing On America’s Debt Ceiling Debate

China has made little secret of its disdain for the way the U.S. political establishment has handled the debate over raising the federal government’s debt ceiling. These extracts from an article carried by Xinhua captures the tone:

The months-long tug of war between Democrats and Republicans, however, failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer…

Meanwhile, the madcap farce of brinkmanship has disclosed yet another ticking bomb in the heartland of the sole superpower in the world — the crippling tendency to politicize the economics while trivializing the politics…

Should Washington continue turning a blind eye to its runaway debt addiction, its already tarnished credibility will lose more luster, which might eventually detonate the debt bomb and jeopardize the well-being of hundreds of millions of families within and beyond the U.S. borders…

Whether Washington’s political elite, intent on grabbing maximum political gain, intended the chaos or not, it is advisable that one should not mess around on the edge of an abyss. Given the heft of the United States, such a dangerous practice is tantamount to a bomb of mass destruction. If left unattended, it might explode, and the whole world will have to deal with the shock waves.

Meanwhile, while Americans wring their hands over whether their credit rating agencies will downgrade their country’s AAA rating despite the deal the U.S. Congress has passed, Chinese rating agency Dagong has gone ahead and done so. It downgraded the U.S.’s credit rating from A+ to A, with a negative outlook. China is the largest foreign holder of U.S. government debt, at $1.15 trillion in May. It has been trying quietly to scale back the growth in its exposure, though, truth be told, with the euro in crisis, it doesn’t have a lot of overly attractive alternatives so is stuck with what it has got.

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