This is it — the illusion of China (net) selling US Treasuries:
From Standard Chartered:
Treasury market and China-watchers both will remember that the latest round of TIC data caused something of a stir in markets last month — with some commentators latching onto the data set as evidence of China beginning to exit from its dollar holdings.
Much of that commentary was unfounded. The TIC data was for one month only (December), and it doesn’t show the purchases made by China out of London or Hong Kong intermediaries.
By Standard Chartered’s reckoning about 90 per cent of net purchases of US Treasuries made by British institutions in 2009 were on behalf of SAFE, which manages the PRC’s foreign currency reserves. You can rather see the effect in Chart 5 below, showing net Treasury purchases by China, Hong Kong and London, plus China’s FX inflows — which it needs to offset.
Of course, even if you assume that all of London and and Hong Kong’s purchases are for China, total buying has still diverged slightly from the FX inflows. Doth this herald the great China dollar-dumping?
Here’s Standard Chartered says:
However, so far at least, we believe China has kept its USD holdings within a normal range. Including purchases through London, China’s total holdings of US securities at end-2009 were still some 68% of China’s total FX reserves. This passive diversification has caused the ratio to fall in recent months, but not to collapse.
In short, the illusion provided by the TICS monthly data – that China has rapidly exited its USD holdings over the past year – requires a second look. There has been some diversification, but China remains a buyer of USD securities, and the share of USD holdings in its portfolio is still relatively high.
China is clearly making efforts to diversify its overall reserve exposure, for instance by buying stakes in commodity firms – the strategy that the China Investment Corporation (CIC) has adopted. But these deals have so far been one-offs which require a lot of work to pull off, and thus only account for a small amount of China’s overall exposure. Moreover, this is the CIC’s strategy, not SAFE’s, and the latter remains a portfolio manager.
In 2010, China may indeed continue to decrease its exposure to the USD, but the latest data suggests that this is much easier said than done – and that it will be a gradual process.
Related links:
Treasuries, dollar and sense – FT Alphaville
TIC-ed off - Macro Man
China’s punishment, Treasuries’ pain – FT Alphaville
China’s Treasury confidential – FT Alphaville