The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested

Tyler Durden's picture

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
any event.

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).

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Anonymous's picture

Vulcan's never bluff

buzzsaw99's picture

I hope they stick it to the usa banks good with a boycott of crap securities.

Anonymous's picture

Got TBT?

Anonymous's picture

this interesting.....on the one hand fuck communist china....the decision to sell arms to the taiwanese was the correct decision.....

yet i am not sure that this selling of assets is not but a clever way to allow obama to abandon the taiwanese because the communists made him do it....indeed usa financial considerations are grave matters of state and security thus we must dump the taiwanese for state security....

on the other hand, if fake president obama has made a principled decision to support the taiwanese it could expose usa financial and state weakness and demonstrates once again the follies of becoming dependent upon adversarial foreign states....selling your jewels and soul for a quick economic fix is not brilliant statecraft to put it mildly....

but obama has put himself in the position of being humiliated especially if he caves in and cancels the arms sales....

i don't know what the desired outcome here is: 1. dump taiwan 2. stand up to communist china....

usually the usa bends to communist countries because the plutocrats have established the communist and totalitarian governments....and a lot of the times the tension is just a game behind the scenes - fake war - like the fake permawar on terror.....

if obama stays the course (quite doubtful) it should serve as a wakeup call for the usa to puts house in order....

not sure how harmful this selling would be. something to watch....how much does china really have of the types of securities it wants to sell?

taiwan should remain free.

moneymutt's picture

the thing that really irritates me is the Dalai Lama thing...Taiwan should be free, but I can see any country having concerns about someone selling arms to a nearby neighbor that is a concern to them..but Dalai Lama simply advocates that Tibet be treated in accordance to Chinese constitution, DL has not fomented violent rebellion. That like us retaliating if Chinese visited with someone advocating not for Hawaii independence but Hawaii to be treated as more independent than a state per some such pre-existing status in our constitution....so we would cut off China if they met with peaceful radical advocating a legal method of changing our relationship with Hawaii...what evah, I'm tired of US, everyone being scared of China in this regard.

And wasn't Reagan credited with taking out USSR by talking tough to them? 

Anonymous's picture

Are you kidding me? Go and tour the US to tell that the Indians should be able to contract whatever alliance they want as they are sovereign people. You wont last long.

Even Haitians have tasted for more than 200 hundreds years the issue of living on a strategical platform off the US coasts.

Painting the US as they are not does not help.

moneymutt's picture

Seriously, if China or Venezuela invited an indigenous US leader that was advocating for more mineral rights, more independence via legal, constitutional methods for his tribe, say he/she had a case winding its way to SCOTUS, do you think US would start making big economic threats about someone else meeting with said leader..say Hawaiin leader was asking Hawaii have a more independent status like psuedo sovereign nation status of Indian reservations but was doing it in legal, civil political manner, making a constitutional argument, or if it was a Puerto Rican leader or Guam leader, really you see US going China/DL on this?...While a US admin might talk against this movement, resist the change in status, I have a hard time seeing how even more hardline US admins like Reagan or W's starting financial trade wars over the China meeting with such a person.

Don't get me wrong, I have huge critiques about bad things US does, and no doubt we politically and economically mess with people who have done small things...shoot look at the horrors of our actions in Nicaragua, Guatemala, and what, are there even 5 million people in either those countries? What real threat were they to us other than diminishing profits for some multi-national?

But just as US is wrong in many things, just as we are oversensitive, too protective about many things, (see Israel), so is China...

tyranny and imperialism abound...

not trying to say or even figure out which is country/regimes are worse, but DL is no where near as radical as, say, Arafat was, as he was willing to be violent, call for Israel to be wiped out...not quite DL talking points, and yet China bristles...get over it...

velobabe's picture

the utter chaos created in developing the panama canal.

Anonymous's picture

So I jump ship in Hong Kong and make my way over to Tibet, and I get on as a looper at a course over in the Himalayas. A looper, you know, a caddy, a looper, a jock. So, I tell them I'm a pro jock, and who do you think they give me? The Dalai Lama, himself. Twelfth son of the Lama. The flowing robes, the grace, bald... striking. So, I'm on the first tee with him. I give him the driver. He hauls off and whacks one - big hitter, the Lama - long, into a ten-thousand foot crevasse, right at the base of this glacier. Do you know what the Lama says? Gunga galunga... gunga, gunga-galunga. So we finish the 18th and he's gonna stiff me. And I say, "Hey, Lama, hey, how about a little something, you know, for the effort, you know." And he says, "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice."

velobabe's picture

man i would love to play golf with his holiness. i even have a pre 1990 ping eye 2 wedge.

faustian bargain's picture

Zero Hedge theme night...I'll take "Bill Murray movies" for 200, Alex.

 

You're a lot of woman, you know that? Yeah, wanna make 14 dollars the hard way?

Double down's picture

Sounds like the Chinese are administrating the medicine the Greeks could use a mouthful of.

This is good news in disguise

Ned Zeppelin's picture

Without researching it, there has been chatter here and elsewhere that the "arms sales" to the Taiwanese are no surprise to the Chinese, and that they were already well underway in the prior (what was that guy's name) Administration. Meaning, not sure you can cast stones on Obama for this one, and the Chinese are simply being the Chinese.  Why hang on to these soon to be underwater Fannies etc.? They are reacting to the end of the QE road, as announced, and agree with Bill Gross, apparently. Sure, implementing this now helps them vent some steam from some anti-US factions but it is the right move anyway. Why take a bigger loss? Time to get out of everything but dollars and USTs.

ThreeTrees's picture

My thoughts exactly.  Arms sales is an excuse.  There's no way the Chinese would telegraph a move like this if it hinted that they actually see the growing cracks in this growth facade.  They're gonna get out while the getting's good and they're gonna save all the face they can doing it.

Tahoe's picture

and bounced again at 1062.75 @ 22:30EST

Anonymous's picture

Time to dump Chinese assets.

Also time to boycott Chinese products.

They want financial war? We give them financial war.

Scooby Dooby Doo's picture

Brilliant! So then what will become of the ZeroHedge 'Store'?

http://www.cafepress.com/zerohedge

No more cups and stuff?

Anonymous's picture

As long as the thongs are still made in the USA...

http://www.cafepress.com/zerohedge.419236014

David449420's picture

Oh, they'll still be available. You'll have to pay for them in Gold, though.

Anonymous's picture

We can live without the junk...
(sorry zh)

Miramanee's picture

Resistance is futile. We are the Borg.

Yossarian's picture

hahaha, China is so powerless yet they masquerade is being so powerful.  As Chanos said, they send us stuff and we send them paper- the situation is clearly not ideal for either party but if they want to stop buying our paper assets we will stop buying their stuff.  We can easily cut back 20% on their stuff but they can't take a 20% reduction in demand for their exports.  Such a situation would mean a painful but manageable recession/depression for us and probably a revolution for them as their urban centers will be full of angry, unemployed former rural farmworkers.     

strike for return to reality's picture

>they send us stuff and we send them paper<

If it were that simple, the Chinese govt could simply have one half of China dig a hole and the other half fill it in.  (Which would have the added benefit of making the Keynesians here happy.  At least the ones making Goldman Sachs type wages who can afford stuff not made in China.)

 

 

Anonymous's picture

Yeah I'm on that camp...in the end, in a game of stamina, the US would win out.

Cyan Lite's picture

Cutting back on buying their stuff would probably be good for the USA.  That means (gasp) we'd actually have to produce something here in the States...

Anonymous's picture

In terms of producing things...
1:) Do you think that will happen? No.
2:) Who are we going to borrow money from to
make all sorts of new industry/factories? Ooops.
3:) Do you think Asia will let us get
our industry back? Hahaha.

MarkD's picture

Not sure if Americans are ready to fill their shopping cart only part way, or buy something they actually need and not due to their wants. Workers over here complain if they don't get 5 weeks paid vacation, sick days, health care, dental, club memberships.....etc. All that combined with gov intervention in our business operations, how can we make stuff over here and keep costs at a level where American's will be able to "Save Money.....Live Better". Unless a company is defense related or is deeply in debt, I don't see how they will survive by producing products for our QVC shoppers. I am a small busness owner and am amazed how many sick days, vacation days and holidays friends have off that work at regular jobs. We are fat and lazy and don't want to give up our shopping desires.

Anonymous's picture

Ever stop to think that while your friends aren't at the office during their sick days, vacation days & holidays, that maybe, just maybe, they're out doing their own thing making money -- *not* via their main source of income?

Well, maybe not your friends. But I assure you, there are people out there who use their free time to produce some side income.

To be honest, you sound a bit jealous of your friends, and using that jealousy to justify casting a wide net and erroneously stereotyping Americans.

Anonymous's picture

Exactly correct, Yossarian. If push comes to shove and the US simply shuts down trade with China we will get a little poorer, if that is possible. But China collapses without the U.S. export market. At the end of the day China will be sitting there with a bunch of empty factories. We'll build new ones in Vietnam, Thailand, or maybe ever here!

Sell, China, sell.

Anonymous's picture

Another one. Funny. On black Fridays, people die to buy those chinese junk goods. Can China do without USD? It will be difficult as they will need to convert Huan on a world stage. Can the US live without chinese made goods? Even more difficult. Chinese low cost goods are what holds the US society together. Already, there is a growing frustration over the matter of jobs. Now if people are cut from being able to afford to buy stuff, prepare the ammo.

Anonymous's picture

Do you think the largest USA company, Wal-Mart,
wants to see that happen? Probably not.
Yeah, yeah, but if it did, it would be better
for our economy. Well, tell that to the Wal-Mart
lobbyists.

Anonymous's picture

Do you think the largest USA company, Wal-Mart,
wants to see that happen? Probably not.
Yeah, yeah, but if it did, it would be better
for our economy. Well, tell that to the Wal-Mart
lobbyists.

Anonymous's picture

Do you think the largest USA company, Wal-Mart,
wants to see that happen? Probably not.
Yeah, yeah, but if it did, it would be better
for our economy. Well, tell that to the Wal-Mart
lobbyists.

Anonymous's picture

Do you think the largest USA company, Wal-Mart,
wants to see that happen? Probably not.
Yeah, yeah, but if it did, it would be better
for our economy. Well, tell that to the Wal-Mart
lobbyists.

Ripped Chunk's picture

I repeat myself when under stress

Anonymous's picture

Really? Look around you. Practically EVERYTHING we buy comes from China now. If they turn off the consumer goods spigot then what the hell are we going to do? We barely have a domestic manufacturing base anymore. It took decades to dismantle our manufacturing capacity and it will take a hell of a long time to build it back up again. In the meantime, can we really go without clothes, electronics, toothpaste, and millions of other mundane consumer items we take for granted every day? As for the Chinese, having a surplus of consumer goods on their hands due to reduced American demand hardly seems like a problem. They'll find ways consume any surplus themselves - the proposed increase in Chinese wages is a perfect example of how this would come about. Don't kid yourself: we need their stuff a lot more than they need the U.S as an export market.

plocequ1's picture

Do you blame them? Who the fuck would want to hold on to these cheezy, Foul, Shit smelling, Stanky, Corrupt, low grade timebombs anyway? These are time bombs ready to go BOOM!!

ShankyS's picture

When do we get to stop being the bitch in this relationship?

Anonymous's picture

Never.

Buy China, Sell America, Euro, Etc. One the "relief" of whatever keeps Greece afloat for a few more years is.. If that..

Anonymous's picture

Soon--we're reaching a jobs calamity of our own!

Gold...Bitches's picture

depends on what you mean.  so long as were the reserve currency we get to send paper to countries for commodities and finished goods.  those holding ever more worthless bits of paper that the US 'guaranteed' to pay, but not its value, are the ones who are the bitch.

Anonymous's picture

So why is gold still going sideways?

SayTabserb's picture

It seems to me the Obamanauts were talking to their Commie financiers about this very thing for some time before this announcement. Doesn't the explanation for the sudden "explicit guarantee" of all things Fan&Fred on Xmas Eve suddenly snap into place? And the commission to reduce the deficit, by Exec Order if necessary? A whole new kind of bipartisanship.

CONners's picture

We have probably already seen the implementation of this policy for some time. Why show your cards until you must?

perchprism's picture

 

And yet Fannie and Freddie remain off-balance sheet, despite the xmas eve pronouncement. 

Anonymous's picture

Let's not go bringing the farcical deficit commission into any serious discussion here. That was a Republican idea, and as soon as Congress actually put it up for action, they turned it down (because if Democrats support it, they're against it).

Greenbacks's picture

The Chinese advantage in a trade war; their population is much more able to withstand the turmoil. America is a nation of soft, spoiled whiners.

SayTabserb's picture

No doubt they're tough. But as far as population is concerned, our very softness probably means that in terms of total mass, we're probably pretty close, even if they have 4 times as many (normal sized) people. Thus, we can get through it through liposuction, using the blubber to light the street lamps.