It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.
From Asia Times:
Dollar-denominated risk assets, including asset-backed securities
and corporates, are no longer wanted at the State Administration of
Foreign Exchange (SAFE), nor at China’s large commercial banks. The
Chinese government has ordered its reserve managers to divest itself of
riskier securities and hold only Treasuries and US agency debt with an
implicit or explicit government guarantee. This already has been
communicated to American securities dealers, according to market
participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in
the wake of a sharp widening of corporate and mortgage spreads during
the past two weeks, or whether there also is a political dimension.
With the expected termination of the Federal Reserve’s special facility
to purchase mortgage-backed securities next month, some asset-backed
spreads already have blown out, and the Chinese institutions may simply
be trying to get out of the way of a widening. There is some
speculation that China’s action has to do with the recent deterioration
of US-Chinese relations over arm sales to Taiwan and other issues. That
would be an unusual action for the Chinese to take–Beijing does not mix
investment and strategic policy–and would be hard to substantiate in
Furthermore, demonstrating just how seriously China is approaching a populist-driven adversarial stance with the US, was earlier speculation that instead of unpegging its currency (a move much desired by the US administration in its goal to further weaken the dollar and make China less competitive in the export market), China would reduce its trade balance not by the traditional way of currency inflation, but by the economic textbook footnote approach of raising salaries.
Higher labor costs would cut Chinese export competitiveness
while boosting domestic spending power and sustaining economic
growth, according to the bank. Premier Wen Jiabao’s government
has been pressed by U.S. and European officials to end a 19-
month yuan peg to the dollar to help diminish trade and
investment imbalances that contributed to the credit crisis.
“Wage increases are a better option because they largely
benefit Chinese workers,” Tao Dong, a Credit Suisse economist
in Hong Kong who has covered the Chinese and Asian economies for
more than 15 years, said in an interview yesterday. “Currency
appreciation will only result in Chinese exporters losing out to
competitors in countries such as Malaysia and Mexico.”
The strategy may limit gains in the yuan to 3 percent this
year, according to Tao. This month’s 13 percent increase in
minimum wage in eastern China’s Jiangsu province indicates that
higher pay will play an important role in officials’ efforts to
rebalance growth in the fastest-growing major economy, Tao said.
The wage decision “argues against a large one-off yuan
revaluation,” Ben Simpfendorfer, an economist with Royal Bank
of Scotland in Hong Kong, wrote in a note this week.
One thing is certain - China will now focus on doing precisely the opposite of what America would urge Chinese authorities to do, in order to establish itself as the focal point of negotiating leverage and increasingly humiliate the Obama regime. If this involves selling USTs or corporates (both fixed income and equities) so be it. This is further confirmed by carefully worded disclosure in today's copy of China Securities Journal:
The China Securities Journal, a government-backed daily, accused the U.S. in a tough-worded front page editorial of playing the "exchange rate card."
It said that, just as China didn't interfere with Federal Reserve purchases of U.S. Treasuries, "the U.S. has no right to interfere in China's exchange rate policy."
"Whether or not to appreciate is our own business," the newspaper said.
"Whether it will appreciate, when and by how much is an integral part of China's monetary policy."
It is not clear when the asset divestiture directive takes place or if it is already being enforced. Juding by the afterhours action in futures and the currency markets, some dumping may already be taking place. Alternatively, we now know just who it is that sell into every rally (yes, even in this market, every buyer is matched with a seller).