Tag Archives: U.S. Treasuries

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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Looks Like China is Still Buying U.S. Debt

The U.S. Treasury has upped its estimate of China’s holdings of U.S. securities last year, to $1.61 trillion as of June 30th, of which $1.48 trillion was long-term debt, typically Treasury bills with an original term-to-maturity of more than one year. The change is a function of the way the U.S. Treasury collects the statistics as much as anything, of which more later.

The preliminary data, as this revision is known, suggests that any thoughts that Beijing is divesting itself of U.S. financial assets are wide of the mark. Final data is due to be published towards the end of  April.

China accounts for one seventh of the foreign holdings of U.S. securities and more than one fifth of the foreign holdings of America’s long-term debt, on the basis of these latest numbers. It has long been believed that the U.S. Treasury undercounts China’s holdings of U.S. securities. Chinese purchases made through international financial centers, notably London, and held by a custodian there, show up under the third country’s ledger, the U.K. in this case. This custody bias, as it is known, is a methodological problem that affects more purchasing countries and financial centers than just China and London. The successive rounds of estimates are intended to minimize it and thus give a truer picture of who really owns what.

The numbers are further distorted by the U.S. Treasury’s way of getting round the time lag in reporting purchases of long-term securities by adding monthly net transactions to the number established at the previous annual report. Most of the trading of long-term securities takes place in international financial centers and netting out transactions between them doesn’t necessarily reflect the nationality of the ultimate buyers and sellers.

A final wrinkle in the numbers is that short-term bill holdings are reported to the U.S. Treasury at face value but the numbers for long-term securities are collected at market value and non-marketable securities at current value. Thus the table of Major Foreign Holders of U.S. Securities is a hybrid of market and face values. (More on the methodology from a 2006 paper that is as good and long now as it was then, here; and from a shorter though no more contemporary note, here.)

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America Demotes China As Its Banker

How do you get tough on your banker? As we know from Wikileaks, that was the rhetorical question U.S. Secretary of State Hillary Clinton posed to Australia Prime Minister Kevin Rudd in 2009. She may not realize it but she has just changed banker, from Beijing to New York.

New figures from the New York Federal Reserve Bank show that its holdings of U.S. Treasury securities now exceed those of China (via FT). Thank the Fed’s quantitative easing, under which it has been buying up Treasury debt under several programs that the New York Fed conducts, the New York Fed now holds $1.1 trillion of U.S. government paper. China holds $896 billion-worth and Japan $877 billion, according to the U.S. Treasury’s most recent data on foreign holdings. Foreigners hold $2.6 trillion of U.S. Treasuries in all.

Once the Fed’s quantitative easing program is complete in June, the New York Fed may be holding $1.6 trillion in U.S. government debt, close to Beijing and Tokyo’s combined total.

Footnote: If China isn’t buying U.S. debt, what is it buying? Gold, or at least ordinary Chinese are buying it by the ingotful, according to the FT:

China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world’s largest consumer of the precious metal.

We noted late last year that China’s gold bugs were shining bright. They have clearly not lost their luster. The FT quotes the estimate of one banker that China has imported 200 tonnes of gold over the past three months.

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China Still Largest Holder of U.S. Treasuries

When the U.S. Treasury announced its December numbers for net foreign holdings of U.S. Treasury bills earlier this month showing Japan had displaced China as the largest holder, we advised a watch and see approach. Having waited a couple of weeks we now see that the U.S.Treasury has revised its figures — not uncommon — and China’s holdings weren’t overtaken after all. China held $894.8 billion in Treasury securities at the end of December, more than the $755 billion previously estimated, the U.S. Treasury now says. Japan in December held $765.7 billion in Treasuries, less than the $769 billion first estimated. What hasn’t changed is that the value of Chinese holdings of  has fallen since June, when China had an estimated $915.8 billion in Treasury securities. (Full TIC report.) The revision was caused by adjustments made to account for purchases of Treasury securities made by China outside the country, such as via Hong Kong and the U.K. These are difficult to track. A further round of revisions will be announced at the end of April.

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China Isn’t The Biggest Buyer Of U.S. Debt

Beijing is not the biggest buyer of U.S. government debt, though you would scarcely believe it from reading the public prints. U.S. money market funds bought  three times as much of U.S. Treasuries and Agencies last year as China, $942 billion vs $283 billion, according to Brad Setser at the Council On Foreign Relations. “I am waiting for a round of stories pondering whether money market funds will continue to buy Treasuries and Agencies at their 2008 pace,” he wryly notes.

The comparison may be an anomaly. The credit crisis has disrupted the markets for  money market funds’ usual fare, CDs and commercial paper. The oversubscription of this week’s U.S. Treasury auctions suggest that the forced flight to safety is continuing.

Despite misgivings about the dollar, China is also continuing to buy U.S. debt though it is buying only Treasuries now. At some point, Setser reckons, “the reallocation of China’s portfolio toward Treasuries will eventually run its course – and China’s Treasury purchases will start to track its reserve growth”.  The bigger question for the U.S. will be whether Americans will stop buying Treasuries.


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SAFE, Not So Much

Prime Minister Wen Jiabao is worried about China’ s investments in the U.S. The U.S. has said there is nothing to be worried about. All very nice but the FT is reporting why China feels it has a  bloody nose from its U. S. investments. China, via the State Administration of Foreign Exchange. SAFE has lost tens of billions of dollars of its foreign exchange reserves through a poorly timed diversification into global equities just before world markets collapsed last year, Jamil Anderlini writes.

SAFE doesn’t disclose its holdings except to the party’s leadership so it is impossible to know exactly how much it has lost from diversifying before markets crashed. But assuming that SAFE had $160 billion worth of overseas equities, losses on those investments would exceed $80 billion. The FT draws on Brad Setser, an economist at the Council on Foreign Relations in New York, for its numbers. He reckons SAFE has stakes in companies including Rio Tinto, Royal Dutch Shell, BP, Barclays, Tesco and RBS, though the bulk of its holdings remain in U.S. Treasury bills,

The circle is closing.

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Wen Armed And Ready

The top-up stimulus that Prime Minister Wen Jiabao was expected to announce at the National People’s Congress but didn’t does exist, he says, but he is keeping it in his back pocket until and if needed. Nor will he say what’s in it, only that “we have reserved adequate ammunition…At any time, we can introduce new stimulus.”

Just the confirmation of its existence was enough to cheer equity investors. Not so bond investors, following Wen’s expression of concerns about the safety of its extensive holdings of U.S. Treasuries and other dollar-denominated debt. “We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a press conference following the NPC meeting. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

Take that as an admonition to Washington not to inflate its way out of recession by printing money. Of course, if Beijing did sell its U.S. debt on any large scale it would only self-defeatingly drive prices lower.


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