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.
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

That's the entrepreneurial spirit!

buzzsaw99's picture

screw them. screw the usa maggots too.

Anonymous's picture

Yeah. A hard American is one who goes three full hours without a happy meal. Americans really are pathetic when called upon for real sacrifice.

Ripped Chunk's picture

And your nationality (oh mighty hard one) would be???

Anonymous's picture

you must be French

Anonymous's picture

This does not end nicely for the United States.

They can destroy us via our currency.

Quantum Noise's picture

WTF are you talking about? How much do they have... $2T? Pffft! Ben can print these in an afternoon...not to mention that the rich guys in the middle east will be pretty pissed off if their USD denominated assets go down just because some Chinese general felt insecure about his underinflated undies.

Anton LaVey's picture

US$2 trillion printed in an afternoon? More like 45 seconds. You need to update a lot of databases, but these computer thingie are pretty freaking fast these days.

VegasBD's picture

I was guessing it would be 2011, looks like 2010 is gonna be the beginning of the end now. =\  Im ready, bring it on. Much thanx to ZH and originally Chris Martenson for the wakeup call.

buzzsaw99's picture

zh gets the scoop, again.

Great Depression Trader's picture

Interesting how things could unravel just because of a arms sale. Obviously there are other factors involved that have created tension between the two nations. This could be the spark that begins to deteriorate relations between the two nations.

johngaltfla's picture

They're just a bunch of retarded backasswards rice farmers. Denninger said so.

No big deal.

Anonymous's picture

Ah! Ignorant prejudice the bastion of self-delusion. The chinese will be telling their children to eat because starving miscegenated and blundering westerners can't.

Although they may be eating each other.

Bear's picture

Wow ... leave it to the unscrewable Chinese to be the first one out

Anonymous's picture

Why can they wait after Chinese New Year?

Anonymous's picture

Weekly Geopolitical News and Analysis100208: Simultaneous military, G7 and BIS summits point to something big
Major world changes are clearly close on the horizon. This past weekend saw a G7 Finance Minister’s summit near the North pole, a BIS central bank governor’s summit in Australia and a gathering of the world’s military leaders in Germany.

economessed's picture

I demand a new 10 minute youtube video from walstreetpro2!!!!


moneymutt's picture

where's Leo, there has to be somethign bullish about this...

and where's combustible assets, that burning bag head always seem so appropriate for posts like this

Anonymous's picture

Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries

Uh, this explicitly states they're continuing to hold Treasuries.

Double down's picture

Did they not just confess to owning a crapload of US equities, something like $9 billion?  It seems ALL Chinese economic decisions are political.


Anonymous's picture

And politics is war by 'other means'....

Anonymous's picture

The House always wins.

Going Down's picture


Asia Times Online may not be correct in its reporting. Why would the Chinese--or any seller--let its intent be known? And if ATol "knows" that these sales are on the horizon, why aren't investors in Shanghai or in Hong Kong bailing out of dollars right now?


There's a wonderful expression in Shanghainese which basically translates into "stir the pot." It's used just in such circumstances to confuse your negotiating party. China may sell but not today.





Double down's picture

Shit is always-already-fully valued.  Who is going to buy this stuff, thought it was toxic?  No buyer no sale only huff and puff. 

Bear's picture

Why now ... GS will surely take it up another 10 SPY pts

Anonymous's picture

yes the source seems questionable

Anonymous's picture

They let it be known because it gets their political position across without ambiguity and because they are hedged against the drop.

Anonymous's picture

Just personally speaking if I wanted to sell something I don't want at its best price, I wouldn't run around saying I think its crap and intend to sell boat loads of it. These Chinese must be damn clever.

Anonymous's picture

RK had it right. "Here lies the man that tried to hustle the East."

jmc8888's picture

You mean raising wages can work? Who knew?


Obama sure got some bad advice, like just about everything since at least june 2008. 


These are interesting times my friends, watch and learn, I know I will. 


Well the Chinese hoped in Obama as much as we did.  You could say the left is hating him, the right obviously does, the independents have abandoned him, the Chinese have lost hope, along with most of the rest of the world, and the bankers ran circles around him. Gee I wonder if any of those are linked? Effects meet the cause.

Yeah Obama, to the Chinese you were our last hope (I suspect).  Once you re-started the Bush tactics of American Bullschmidt all over again, that hope faded (I suspect).  Now they will protect their interests the best way they can as they now know a real solution will not appear from Obama, and I suspect the Chinese reaction to that fact will be very bad for us. 

It seems soon will be the time to choose, the right way of placing the blame where it lies, the system, and those who run it and change to something better.......or......blame each other, the poor, the sick and lazy who had nothing to do with causing this crisis.

Because that my dear friends was the difference between the American Revolution, and the French Revolution.

In our version, cooler heads prevailed

In theirs, heads were cooler because they rolled detached from bodies

I'm optimistic to how we turn out, but we must admit to ourselves we're far closer due to ignorance to the latter (french revolution) than to our more desirable American Revolution. 

Imperialist Monetarism MUST end

Good luck


Anonymous's picture

I agree with much of what you say but the honest answer to the blame game is look in a mirror. ALMOST EVERY mther fker alive in Western World , especially the US and UK , has a share of blame in this cluster fk. We allowed corrupt and inept politicians to stay in office. We bought into the media subliminal bombardments of greed. We all wanted more. We all got more. At the expense of our grandkids.
To blame this economic meltdown on just men in suits on Wall St is too convenient. The poor and lazy have their share of the blame in this , oh yes.

SWRichmond's picture

There was nothing subliminal about the consumerist media bombardment.  The lumpen were a necessary part of the bubble.  Lifestyles of the Rich and Shameless and all.

As for "we all wanted more", be careful about the "we".  Some small percentage of us never believed it was real in the first place.  Maybe it's my background in math.

moneymutt's picture

I think our biggest sin was staying conveniently ignorant of what horrors weere being done in our name, with our tax dollars, we didn't mind while we were fat and happy..and of course, we messed up by not minding our own store, now getting less fat, and less happy and have enemies galore...

Double down's picture

Here is your mark to market

monopoly's picture

moneymutt, wheres Leo. LMAO


And let the Races begin.

Just the timing all.

Get_to_the_choppa's picture

So where can I get my Cold War 2.0 hat?

John McCloy's picture

We are still waiting for China to make them for us. 30 million hats is a tall order. You did not think an apparel company here would actually hire Americans to do the job? How else would the three people at the top of the company save money while everyone else is underpaid. Send all the jobs to China I say..great plan. 

Great for stocks..Right Cramer?

Anonymous's picture

Ben and tim save the world because the concern is social unrest............and what do we get, a boiling pot leading to social unrest.

IMHO, it just seems a matter of time before it is every country for themselves. Not that countries will become protectionist, more of a....f u, i don't care if I do biz with you, here's the price no cod's, pay up front in full.

Anonymous's picture

I wonder how many shares of Wal-Mart are held by China?

Anonymous's picture

Arm sales... UP

Buy any kind of DEFENSE contractor and see it go BOOM.

The game is older than China's lame aspirations to become a super power.

Gong Hai Fat Chink.

WE are the masters of the game. Now chop chop buy some UST or we're blocking the Suez Canal, the Panama Canal and the Northwest Passage.

China needs to export. China needs to import.

One billion people need to eat, work, shit and sleep.

.. oh and they need fuel to power their People's army and their People's power plants and their People's cars.

US rules. US controls reserve currency and most importantly resources. End of story.

BlackBeard's picture

Bring it on bitches.  Let's crush their exports.

Anonymous's picture

Typically, when there is a generalized selling of 'riskier' foreign assets, that often equates with domestic concerns of either liquidity or, more grievously, solvency. I merely suggest that this being linked to a Taiwan arms deal may be an attribution error, and that the issue may lie, not in foreign policy, but rather within the Chinese banking system. Just a thought.

Let's ask Mr. Chanos what he makes of all this muckedy-muck.

chindit13's picture

Here's one of the few instances where taking a conspiratorial bent might be prudent.  I read this as an indication that China's domestic problems are more serious than we suspect.  China traditionally puts up some bogeyman against which popular frustration can be directed (rather than at the Party).  Usually they use Japan, but the "white devil" works better at a time when China has illusions of being Papa Asia, and a new and weak Japanese PM is making nice to them.  To do this right before Lunar New Year (Kung Hei Fat Choy to all) is highly unusual, as happy happy is the preferred societal mood.

There is no way China can consume its own production in any near term time frame, so at this time they need the US (and Western markets) more than the West needs them (the US can always default by CUSIP number on UST's as a last resort).  China also needs the technology which they have been absent in producing for nigh on 2500 years.  At present they get this technology from either joint ventures (a bit) or theft (most). Cut off the tech flow and China's economy stagnates at closer to the t-shirt and carnival prize stage of development than high margin computer chips and cutting edge bio-science.

If Obama doesn't send Timmy or Hillary over there this afternoon, then the US feels pretty secure with the hand it holds.


Altan311's picture

they are sitting on a huge basket of technology, including workable nuclear fusion assuming they can find the fusionable material to run some reactors. Lots of it on the moon, not so much here, but that explains their space programs goals nicely doesn't it? They have jumped the shark so to say and are perfectly capable of innovating. Don't let backward ass American opinions cloud your judgment. I am Mongolian, and my people beat the Chinese by starving them out, and then stealing their siege engineers. Wouldn't surprise me to see some weather warfare in the near future...

chindit13's picture

Appreciate your comments, but I don't have too much access to "backward ass American opinions", as I have resided in various Asian countries for the last 30 years, speak a number of the languages, and have had a front row seat to the various and sundry "miracles".  Not saying I am right, just that I have "informed ignorance".