China-dumping fears — of Treasuries or other assets — have long been on the minds’ of investors.
On Wednesday those fears hit the blogosphere, big time.
From the Inner Workings blog of the Asia Times:
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.
Unusual indeed but not necessarily impossible.
China’s state-owned media have happily trumpeted the selling of US debt before. Meanwhile, Reuters is reporting that certain Chinese military officials are proposing their country sell some US Treasuries to “punish” Washington for those arm sales to Taiwan. Indeed, if China really did want to “punish” the States, selling off its vast portfolio of US debt would probably be the best way to do it.
China holds something like $790bn worth of Treasuries, according to official data, and about $830bn – $970bn according to analyst estimates (which can take into account China’s Treasury purchases made through London brokers). In terms of overall holdings of US securities, Standard Chartered estimates the country had about $1.44 trillion at the end of August ($34bn more than offiical data):
Nevertheless, China still needs US debt to help offset its massive FX reserves — which it continues to build. We doubt it has yet found a better place than the US market to recycle its currency inflows. And until there’s concrete evidence of net-selling of Treasuries, threatening to sell US debt remains simple sabre-rattling over American finances.
It does, however, say something about the wider (delicate) Chinese-US relationship.
Update: Just to hammer the point home, here’s some recent commentary from RBS chief strategist (and bear) Bob Janjuah:
1- China/US – ‘Agreeing’ to sell arms to Taiwan, talk about meeting the Dalai Lama….these are BAD developments and important ones….I fear the outcome for the West, esp the US, but also the UK, if the idea is to flex muscles in the direction of China. I am sure the US would not take too kindly to China agreeing to sell serious military hardware to Vene or Iran, nor would it take too kindly to the Beijing authorities hosting a global fundraising conference for global jihadists. NO, I am not saying Taiwan is the same as Iran/Vene, and of course I do not think the Dalai Lama is in any way comparable with al-Qaeda. But what I think is NOT the point. It is all about the Chinese leadership, and I reckon they must be seething. We in the old West need to be very very careful here. China funds the US to a meaningful degree. Imagine if China decided to stop buying US govt/agency debt. And then imagine if it decided to sell 300/400/500bn of such debt, say on the same day as the next big auction. The word UGLY comes to mind. My real fear is that PROTECTIONISM might become THE central issue later this yr as a result of all of this. Not good at all.
Update: The European FX analysts at BNP Paribas seem to have confirmed the SAFE report:
Dollar-denominated risk assets, including asset- backed securities and corporate, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest themselves of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events. Meanwhile, the Chinese military has urged the government to sell US bonds, boosting defence spending on Taiwan arms deal. Hence, we watch US spreads intensively. A widening of spreads would not bold well for share markets while putting economic recovery at risk. It was US liquidity feeding financial markets until January this year. Hence a decline of risk appetite suggests repatriation flows moving back into the USD.
Related links:
China’s Treasury confidential – FT Alphaville
China to US: We hate you – FT Alphaville
All the Treasuries in China – FT Alphaville