A blog on Chinese economy & society

Is China dumping treasuries?

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This is the million dollar (literally!) question.

Yes China had said that it wouldn’t use the nuclear option and probably meant it, ’cause there’s no need for it to actively sell down UST. As today’s TIC data indicates, China trimmed its UST holdings by not rolling over its maturing T-bills. This way, China can reduce its UST holdings w/o alarming the market. Plus, China also has large amount of foreign currency inflows each month from its trade surplus. It can simply buy less of the UST.

The question should be where does China put its cash instead? In addition to resources shopping spree across the globe, another option is to diversify into other currencies. JGB and euro bonds have both seen strong Chinese demand lately. The FT reports that Chinese Premier Wen Jiabao voiced strong support for the euro during a state visit from Angela Merkel. What it fails to pick up is the connection between that and China’s recent change in its currency regime to a reference making up of a basket of currencies. Reuters is doing a better job of reporting the meeting.

China is a responsible, long-term investor that has always pursued the principle of diversifying its investments, Wen said.
“The European market has been in the past, is now and will be in the future one of the main investment markets for China’s foreign exchange reserves,” he said.

Given the massive appreciation of RMB against the euro so far this year, diversifying into euro assets has the added benefits of supporting Chinese exports to Europe, China’s largest market, bar none. Given time, it will also result in slight appreciation of the RMB against the USD, deflecting some political heat. But make no mistake, there’s no free lunch in this world. Diversification away from treasuries will surely have an impact on US interest rates. Spain “successful” bond issue last Tuesday came at almost 15% higher yield than in April.


Written by Cindy Luk

July 17, 2010 at 2:45 am

Posted in China, Macro

Tagged with , , ,

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