China and the missing Treasuries | FT Alphaville

China and the missing Treasuries

An amusing Bloomberg chart from last week:

The idea is that given the large additional asset purchases expected from QE2 and the ongoing Bank of Japan interventions, the US Fed and Japan could soon overtake China as the biggest holder of US Treasuries.

But that’s only if you’re confident in the accuracy of the monthly Treasury International Capital System data, which was updated on Monday. And we aren’t — in reality, the volume of China’s treasury holdings is probably a good bit higher.

The TICS data show that China finished August with Treasury holdings of $868bn, an increase of $21bn over July. But that’s the wrong number to focus on.

Have a look at this chart from Street Sweep:

The UK increased its Treasury holdings from $374bn in July to $449bn in August. And since the end of August 2009, the amount has more than quadrupled. In that same period of time, China has reduced its holdings from $937bn to $868bn. Or so say the TICS numbers.

These monthly numbers are based on interviews with US financial institutions. But once a year, the Treasury department also conducts a tedious, time-consuming survey of the major foreign investors in Treasuries, including central banks. As the annual surveys are considered more accurate, the monthly numbers have to be revised.

Why the discrepancy between the monthly and annual numbers? We’ll post again an explanation from Deutsche Bank that we reported earlier this year:

Theoretically, the cumulative net purchases should add up to the changes in the annual holdings surveys, but this is not the case, since errors can creep into the monthly purchase surveys. The biggest source of error is that it doesn’t record transactions between foreign entities. Thus if a UK bank sells Treasuries to an investor in China, it isn’t recorded in the TIC data. But even the total purchases exhibit discrepancies, suggesting that there are simply errors in record-keeping.

Now consider the most recent revisions, which were published in February but covered the year through the end of June 2009:

China’s holdings were revised up by $139bn, while the UK’s holdings were revised down by $124bn — nearly offsetting each other entirely.

As we’ve previously reported, China buys a lot of its Treasuries through brokers in London. And the revision earlier this year is nothing new. If you look at the data from prior years, which includes the revisions, you’ll notice the pattern. The UK’s holdings increase from June of one year to June of the next, and then the majority of these additional holdings are revised away. (The June 2009 revision reduced UK holdings from $214bn to $91bn.)

Or in the words of Standard Chartered analysts, the annual survey “ends up reallocating most of the UK purchases during the previous year to China.” We should note, however, that this can’t explain all the revision in the UK holdings every year — in some years there has been a much larger discrepancy between this downward revision and the corresponding upward revision in the China holdings.

We won’t know how the June 2010 numbers will be revised until early next year. And we have to wait until 2012 to have a better idea of the extent to which last month’s huge $75bn increase in the UK’s holding is attributable to China.

But if you’re keeping track of which country is likely to be the biggest holder of US Treasuries in the near future, don’t discount China just yet — it might have a bigger lead than you think.

Related links:
Treasuries of the Carribean – FT Alphaville
China’s Treasury confidential – FT Alphaville