Tuesday, February 16, 2010

China Sells Treasuries... or Did They?

Bloomberg (like every major media entity) reports:

China’s ownership of U.S. government debt fell in December by the most since 2000, allowing Japan to regain the position as the largest foreign holder of Treasury securities.

Japan’s holdings rose 1.5 percent in December to $768.8 billion while China’s dropped 4.3 percent to $755.4 billion, Treasury Department figures today showed. China allowed its short-term Treasury bills to mature and replaced them with a smaller amount of longer-term notes and bonds, the data showed.

China, with the world’s largest central bank reserves, may be moving money to other investments from the relative safety of Treasuries as the U.S. runs record budget deficits, economists said. China’s Treasury holdings peaked at $801.5 billion in May, and net sales in November and December were the first consecutive months of reductions since late 2007.

So Japan has passed China in total Treasury holdings.... or have they?

Looking at the above chart we see that the United Kingdom is listed as the third largest holder of Treasury bonds after the MASSIVE 12 month change seen below.

This is where I miss Brad Setser and his blog Follow the Money (he left blogging when he went to work for the White House). As he detailed back in the summer:
China tends to account for a very large share of purchases through the UK.

From mid-2006 to mid-2007, about 2/3s of the UK’s purchases of Treasuries were ultimately reassigned to China. I would expect the something similar is happening now — all of China’s bill holdings tend to appear in the US data in real time, but only a fraction of China’s long-term purchases tend to show up directly in the US data.
So (most of / some of?) these purchases by the United Kingdom were likely on behalf of China. Below is the last jump / reset cycle, though it is important to note that this cycle has happened on six occasions since 2002.

So has China stopped buying Treasuries? It doesn't appear so... yet.

Source: Treasury

Update: it looks like the WSJ (hat tip Rolfe Winkler) picked up the story and explains the why:

To maintain a steady dollar/yuan rate while running a huge balance-of-payments surplus, China's central bank has little choice but to recycle that surplus into dollar-denominated assets. And U.S. Treasurys remain the easiest and safest place for China to park its foreign-exchange reserves.‪

Meanwhile, indirect Treasury purchases suit China politically. Headline data showing mainland China's purchases of Treasurys leveling off help allay domestic criticism that China, a "developing" country, is keeping the profligate U.S. government afloat. ‪It also injects a grain of doubt into the minds of free-spending U.S. policy makers when it comes to assuming that China will always be there to snap up the country's debt.


  1. good stuff.

    thanks a lot Jake!

  2. Great minds think alike - I said this yesterday.

  3. Nice charts Jake.

    Any idea what Canada is doing increasing its U.S. Treasury holdings by $40 billion? They're total foreign reserves are only $50 according to the IMF.

    Here's A Worthwhile Canadian Initiative posting the same question.

  4. i'd like to know how technically China buys US Treasurys through UK wihout showing a reel exposure ?

  5. One question I have had about this is why the change in how they buy? The TIC data showed some pattern and quantity of purchases made by China. Why change how they buy to route through the UK? If the analysis that they are going through the UK turns out to be correct, is it a attempt to hide their intentions for some sort of political reason? Would they really think they are fooling anyone with this?

  6. @j: through some nominee arrangement, I guess - no doubt Setser would know.

    @Roger: good Q's. If they are buying by proxy, they certainly seems to have fooled the MSM, haven't they? I would guess that they are alive to American sensitivity about being so in hock, and to an increasingly powerful Communist country. Also, is it likely that the UK, which has debt problems worse than the US (relative to GDP) could turn from her own QE to spare a further $300 billion to buy American debt?