Why Yes, China is Already Unloading US Treasuries

♠ Posted by Emmanuel in at 2/17/2010 12:30:00 AM
I haven't the slightest idea of why most media outlets and the rather logic-proof foreign exchange market haven't made more of the news that, yes, China is shedding its identifiable holdings of Treasuries. Fortunately, the ever-reliable Reuters--my favourite newswire nowadays--picks up the trail. Not that it's showing up in the yen's value but Japan has actually surpassed China in terms of recorded official holdings for the first time since August of 2008:
China fell behind Japan to become the second-biggest holder of U.S. Treasuries in a sign the Chinese have been acting on recent complaints about U.S policy by unloading U.S. debt. As one of the biggest creditors of the United States, China has complained over the past year about U.S. policies and worried publicly about the security of its dollar-denominated assets.

China sold more than $34 billion in short- and long-dated Treasuries in December, bringing its total holdings down to $755.4 billion from $789.6 billion in November, according to U.S. Treasury data released on Tuesday.

Some analysts fear a waning appetite for U.S. debt could push up Treasury yields and weaken a fragile U.S. recovery. "Net-net this data is only going to add to second guessing of Chinese behavior and raise concerns that they are not showing much enthusiasm for U.S. dollar-denominated paper," said Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Connecticut.

Ties between China and the United States have been tested several times recently on issues including currency, trade, Internet censorship, human rights and U.S. arms sales to Taiwan. Japan, by adding $11.5 billion, raised its total holdings to $768.8 billion, surpassing China for the first time since August 2008.
There is no rocket science with this observation as the relevant data is easily accessible. PRC holdings peaked in May of 2009 at $801.5 billion and have fallen since then. That said, I'd be disingenuous if I didn't mention the appropriate caveats: First, note the sizeable difference between what Treasury records as China's American holdings--the $755.4 billion--and what observers think China holds in terms of dollar-denominated reserves--widely believed to be 70% of its official reserve total of $2.4 trillion or $1.68 trillion. Obviously, not all of China's holdings are in Treasuries with some in agencies (Fannie Mae and Freddie Mac paper), corporate bonds, and equities (via its sovereign wealth fund, the China Investment Corporation).

Next, what are mostly captured here are what are known as "custodial holdings" or foreign governments' Treasuries held by the Federal Reserve on the former's behalf. It is thus very possible that China is using other agents or primary dealers to buy Treasuries such as those in other financial centres like London or Hong Kong. Indeed, it may even deliberately do so to produce the impression that it is not increasing or even decreasing its holdings according to TIC (Treasury International Capital system) data mentioned above. Finally, I'd be remiss if I didn't point out that, for the month of December 2009 at least, net capital inflows were a still-healthy $50.9 million according to yesterday's report.

All the same, it's good to see China indicating that it's putting its money where its mouth is at. More of this, please.