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.