Posted on 09/05/2007 1:34:50 PM PDT by blam
Is China quietly dumping US Treasuries?
By Ambrose Evans-Pritchard
Last Updated: 6:55pm BST 05/09/2007
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.
> And they got some great bargains
Absolutely.
BTW - I always find myself short on dollars, so I'm fine with the whole thing :-)
This is a message from China to get us to stop bothering them about their lead-filled products.
The squeeze has begun.
We should tell them to “Flip” off. imo
Certain things are not open to emotion. Treasuries are a commodity and as such their value is determined by the laws of supply and demand. Simply put if China begins a wholesale dumping of our treasuries then the supply in the market place would dramatically increase and the price would drop precipitously causing the yields to sharply rise. This has not happened despite what this article has insinuated. In fact Treasury yields are at 4-5 month lows.
If, on the other hand there are ample buyers for these treasuries then the price will hold up and no damage is done. It really doesn't matter who owns the Treasuries and in fact it is far better they be in the hands of a large number of holders rather then concentrated in the hands of only a few.
"They may think they have a way around your expected results."
As I explained above, there is no way around the fact that tanking our currency will devastate them as much or more then it will us. If all the goods we buy from around the world, and we buy far, far more then any other nation, where to suddenly become much more expensive do to the dramatic drop in the dollars value, then our imports would then dry up causing the nations we buy so much from, such as China, to slide into recession, or worse. It would spread around the world since we are as a nation responsible for almost a quarter of the total GDP of the entire world. Simply put, if we stop consuming the now vibrant emerging markets would crumble as they no longer have anyone buying enough what they are manufacturing.
It's not about emotion, as you claim, but simple economics 101 and the Chinese are not prone to rashness as we have seen by their history but rather take a far longer view of their actions and consequences thereof then we in the West do. The better explanation for there selling, if they are the ones selling is that they want to diversify their reserves into a basket of currencies and not be so dependent on the fortunes of one only. This is a good thing and will benefit them as well as us.
Don't assume that the Chinese think like we do. I have Chinese in my extended family and I know that their ways, in many ways, are far different than what drives westernized Americans. We expose our nation to the greatest amount of danger when we believe that other cutures and nations are driven by the same things as us, even if we think it's basic and natural.
Whats your opinion on what President Nixon did in the 70s? Remember his month-long trip where he visited many foreign nations?
Wasnt he setting us up way back then? He promised those nations that we would send them our manufacturing and in turn we would buy all that junk back from them. (China, Korea, Japan, etc.)
I believe it was his attempt to raise all boats but it seems to have come back to bite us. Im not bashing Nixon, Im just asking, because Im not much of a student when it comes to World Economics. Did that have anything to do with weakening our dollar over the years?
However...my portfolio has gotten quite a bit fatter under President Bush, and my silver holdings are doing well. Maybe Ive just been lucky? (The harder I work, the luckier I get!) :)
Any catastrophe would be mega-bullish for bonds. China’s supposed sales of T-Bonds is primarily a currency play in the short term and anticipatory move against inflation.
When chaos returns, they will come back.
Methinks it's vain pride like that which will lead to our nation's downfall. It really upsets me to hear folks like this spouting off that America is god-like as a nation, and can't be touched/harmed by others. God has a long history of correcting nation attitudes like that. I don't want America to join that list.
I was thinking more along the lines of war with us. They wouldn't want to be stuck with bonds we could cancel.
That statement wasn’t “vain pride” at all. The economist on that show was simply pointing out that the U.S. is China’s biggest trading partner by a wide margin. Destabilizing the currency of your biggest trading partner is preposterous.
By our way of thinking, perhaps. Do we really know what drives China?
Maybe not. I do know that they’ve been perfectly content to function as this country’s massive slave colony for the last couple of decades — which is something nobody in his right mind in the U.S. would ever do.
Fear of armies of the unemployed ending their regime. That's what would happen if they couldn't sell their $300 billion in goods to the US.
Ahh, the gloom and doomers don't understand economics at all. If they even read what they wrote they would see that it is nonsense.
The trade deficit only includes half of the transaction. Figure in the other half (the Monetary part) and there is no trade deficit. I bet the gloom and doomers can't even balance their checkbooks, that is why they like the gold standard so much :)
My favorite Clinton appointee. He's funny!
Yep, we fight inflation at home but in a global economy a weakening dollar buys much less as well.
Before long, they will be quietly invading.
Chinese have been invading secretly for the past 10 years. Or longer. Beijing believes it owns the country. In point of fact, the Chinese may have bought hundreds of billions in mortgages over the past 5 years. They are simply trading their treasuries for hard assets: infrastructure, factories, equipment, commercial properties, high tech hardware, counterfeiting presses and housing developments.
so 2.5 months later, gold up 22%, the Euro (vs. USD) up 9%, 30-year bond prices down roughly 50 basis points.....the big winner indeed is gold.
I should add the treasury move is contrary to what one would expect from chinese dumping, but as others have noted the move to treasuries from other credit instruments has had a huge impact on the market, possibly overriding any central bank selling of treasuries.
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