A blog on Chinese economy & society

Posts Tagged ‘euro

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 , , ,

Impact of the European crisis on China

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While the endless rounds of flip-flops are entertaining in a wicked way, it will be stupid to treat the European crisis as just a reality show. For one thing, the EU, rather than the US, is China’s largest export market, and exporters are already howling from the pain of an effective 14.5% currency appreciation in 4 months against the euro.

What else? Most have given up on any prospect of immediate revaluation of the RMB. The US is already harping a different tone regarding currency ahead of the Sino-American Strategic and Economic Dialogue next week. There are also stories of hot money outflow. Michael Pettis rambles on the prospect of more trade conflicts, perhaps even in the form of tariffs. Shocking! Economic basket case resorts to beggar-thy-neighbor policies and trade conflicts (or any sort of conflicts) intensify during hard times. What’s more interesting is actually at the end of the post, almost as an afterthought, he suggests that China might be able to mitigate the risk by buying euros.

By the way is there anything that China can do to head off conflict?  Yes.  It can buy euros, the more the better –just lift every offer out there.  By strengthening the euro, or at least limiting its weakness, this strategy will force the brunt of the adjustment back onto European surplus countries rather than onto the US and, via the US, back onto China.  Sarkozy and other European leaders might not be very happy, of course, but they will be at least partially mollified by the net capital inflows and the reduced humiliation of a collapsing euro.

I know, I know, China had just sold its euro bonds and parked the money in dollar, as per the most recent TIC data. But I still think this scenario is more than feasible. When the crescendo calling for RMB revaluation was at its loudest, western media were full of quotes from “Chinese experts” that seem to readily acquiesce to RMB appreciation. However, when you actually look at their speech, preferably in the original, what those people are advocating is a reform of the currency management mechanism rather than straight appreciation per se. One term that pops up very often is “basket of currencies”, i.e. replacing the USD reference with a secretive brew of multiple currencies, a la Singapore. Li Daokui, member of the monetary policy committee of the PBoC is flogging the basket of currencies idea these days. A central government think tank is also calling for breaking the “predictable path of currency movement”.

In this sense, the current dollar strength actually gives China good cover to carry out with the proposed reform. Instead of maintaining a hard peg with the dollar, China can intervene by buying up some euros, and selling from its dollar reserves to pay for it of course. This diversification will help to halt the RMB’s appreciation against the euro and will appease to US cries for stronger RMB. Parking your wealth in the bunds is way safer than the treasuries, if you ask me.

The natural implication of this change in regime is an inevitable rise in US interest rate. When you have a buyer boycott, it is possible to have higher interest rate despite hollowing deflation. China has not withdrawn her money from the Bank of the US so far, only because it has nowhere else to go. After a substantial fall in the euro, and most of Europe’s problems priced in, things might look quite different.

The irony of it, should it materializes, is that the RMB might appreciate against the dollar just when about everyone has written it off, and those that pushed for it might live to regret it.

Written by Cindy Luk

May 20, 2010 at 2:42 am