Is China Quietly Dumping US Treasuries?

A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.

Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.

"This comes as a big surprise and it is definitely worrying," said Hans Redeker, currency chief at BNP Paribas.

"We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros," he said.

While the greenback has been resilient over recent weeks - even regaining something of a 'safe-haven' role as banks scrambled to buy the currency to cover dollar debts - most experts believe that America's $850bn current account deficit will eventually cause the dollar to resume its relentless slide.

David Powell, an economist at IDEAglobal in New York, pointed the finger at Beijing as the main suspect in the sudden bond flight this summer.

In a client note entitled "Has China started to dump US Treasuries?", he said the sales appear to coincide with early moves by Beijing to launch its new $300bn sovereign wealth fund.

The scheme is part of the government's plan to diversify it $1,340bn reserves from bonds (mostly in the US) to a broader portfolio of investments and a better yield.

If so, the switch comes at a very delicate time, just as tempers flair on both sides of the Pacific over China's policy of holding down yuan by currency intervention. A bill in Congress calls for punitive tariff sanctions of 27.5pc against Chinese imports, and there has been a growing outcry over contaminated pet food and lead-tainted toys.

Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a "bargaining chip", words taken as an implicit threat to trigger as US bond crash if provoked.

The Chinese government has since put out an official statement clarifying that it has no intention in taking such an irresponsible step, which would in any case backfire by devaluing China's remaining holding.

Mr Powell said the switch out of Treasuires was a purely commercial decision. "If if turns out that the Chinese are behind this, it is merely an attempt to increase returns on investment. It has nothing to do with settling protectionist scores," he said.

Any evidence that China was pulling out would risk setting off an unstoppable stampede, which is why such a policy would never be announced. It holds the world's biggest pool of resrves, followed by Japan.

Robin Bhar, a metals analyst at UBS, said there was little evidence yet that Asian central banks were switching heavily into gold. Most of the recent buying of gold has been on the COMEX futures markets, the playground of hedge funds.

Central banks tend to buy their bullion in London at the AM and PM fixings, leaving a footprint that is visible to experts. They seem to have been largely absent from the market so far.

I received this in an email recently....

Money is one of the most important inventions of humankind. Without it, a complex, modern economy based on division of labor, and the consequent widespread exchange of goods and services, would be impossible. Unfortunately, many experts believe we are on the verge of a financial crisis. In recent years the value of the US dollar has dropped significantly, inflation has increased, consumer debt has reached an all-time high, and the US housing market has become dangerously unstable.

At present, approximately two thirds of world trade is conducted in dollars and two thirds of central banks' currency reserves are held in the American currency which remains the sole currency used by international institutions such as the International Monetary Fund. This confers on the US a major economic advantage: the ability to run a trade deficit year after year. US always spends more than it earns, whereas the rest of the world always earns more than it spends.

The strength of the dollar is closely related to the fact that oil, the most important commodity traded in the world, is priced in US currency. The majority of countries that are oil importers have to buy their oil in dollars, which forces them to keep most of their foreign currency in dollars. However that could change. More and more nations are moving away from the dollar. China, Sweden, Italy, Switzerland, Iran, Russia, the United Arab Emirates and others have already announced plans to gradually move their reserves from the dollar into other currencies such as the euro. A widespread move away from the dollar could cripple the US economy - a sudden shift could even cause the US dollar to crash. David M. Walker, Comptroller General of the United States, has warned that the nation is on the path to financial ruin: "What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. The vast majority of the economists and budget analysts agree: The ship of state is on a disastrous course, and will founder on the reefs of economic disaster if nothing is done to correct it." If the US government conducts business as usual over the next few decades, a national debt that is already $8.5 trillion could reach $46 trillion or more, adjusted for inflation. A hole that big could paralyze the US economy; according to some projections, just the interest payments on a debt that big would be as much as all the taxes the government collects today. And every year that nothing is done about it, the problem grows by $2 trillion to $3 trillion (yes, that's with a "t"). It doesn't take a genius to recognize that an economic upheaval is in the making.

“a shame our government has so completely screwed us (citizens) with regard to our currency, trade, and fiscal policy.”

It was bipartisan. A trade. All for the financial industries getting the chance to provide services in foreign countries, Bush gets to temproarily hide the effect of his tax deferrment, a.k.a., “tax cuts”.

I see only lately Bush is pretty much alone saying his tax deferments “grew” the economy. Of course, he is of the mentality that a domestic wage deflation policy that hurts workers, dumps costs on tax payers, but juices short term profits for the few at the top, he calls that “growth.”

I can’t wait to see he and his cabal of mediocrities out of office.

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