Brad Setser is no longer around to blog about China’s holdings of US Treasuries, so we are stepping in. For today, anyway.
On Monday, the latest TIC data was released. It officially showed that China became a net seller of US Treasuries in June.
The news was was pretty much triumphantly heralded by China’s state-owned media. For instance, the People’s Daily published the story under the headline “China massively offloads U.S. debt holdings [for the] first time in 2009″. Here’s an excerpt:
According to the data published by the US Treasury Department on August 17, by the end of June, China’s holdings of US Treasury Bonds (T-bonds) totaled 776.4 billion USD, down 25.1 billion, or 3.13 percent compared with the country’s 801.5 billion USD T-bonds holdings in May, indicating China’s first massive offload of US debt in 2009.
Happy days for China, given it’s been sabre-rattling over US finances? Not quite.
Standard Chartered analysts Jinny Yan and Stephen Green do a good job explaining why the TIC data is not necessarily as it seems:
… the official TICS data underestimates China’s holdings, partly because China purchases debt through intermediaries – most notably through brokers in London. These do not show up in the TICS data under China’s name, but are instead classified under the UK. This ‘error’ in the monthly survey is made clear in the annual survey, which usually ends up reallocating most of the UK purchases during the previous year to China.
In fact if you assume the UK’s Treasury purchases are in fact China’s you get a net positive for June, seen in Standard Chartered’s chart 2 below — a decidedly different picture from the straight TIC data shown in chart 1.
Accounting for Treasury purchases via London, the analysts estimate that China’s holdings of all US securities (agencies, corporate bonds, equities, etc) still stands at around $1,600bn. As for Treasuries, China’s holdings are estimated to be at $970bn.
Of course, whether or not China is actually adding to its Treasury holdings is almost a moot point. The fact that it’s happy to appear to be a net seller of US Treasuries, even going so far as to issue virtual press releases about it, is itself the news. China may not have found an alternative to USD-demoniated assets just yet, but it wants the world to know that it is looking for one.
Here’s Standard Chartered’s conclusion:
In conclusion, we suspect that China is continuing to add to its UST holdings. Its FX reserves certainly continue to build. June alone saw an increase of USD 50bn. This means the authorities are still struggling to recycle the new FX inflows each month. We suspect that they have not yet found a better place than the US market. However, at the same time, the data does not allow us to conclude this with much certainty. We suspect, though, that if the managers of China’s FX reserves wanted to confuse the market about their activities, booking large orders through London would be an obvious tool to use. And, going further out on a limb, we suspect that local newspaper headlines declaring that China is exiting the much-criticised US debt market will be greeted positively.
Related links:
China must keep buying US Treasuries for now – Reuters report
China’s dollar dilemma – FT
All the Treasuries in China – FT Alphaville