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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Burnbright's picture

You really think China can't consume its own goods when every other western country has debt up to its eye balls... are you high?

chindit13's picture

Well, when you put it that way......Of course they would reach the debt bomb limit a lot faster than others did, since 99% of the population earns less than 40000 yuan/year and must eat, sleep, and commute on that sum before any is left over to repay debt.  I guess in a world where one plus one equals something between six and seven, anything is now possible.

Burnbright's picture

You are making a logical fallacy, you are arguing that these people can not consume the goods that they themselves produce. It makes no sense what so ever. It would be like you making a chair and saying you couldn't sit in your own chair.

Anonymous's picture

Their "innovation" is mostly based on patent infringement. The Chinese had no "innovation" before the West brought technology and IP into the backwoods.

Because of the Chinese IP theft, the industy is advised not to patent anymore. It's like delivering the blue print directly to Bejing, the "People's Thieves".

Anonymous's picture

Which industry?

Anonymous'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.

Wow, that's the most ignorant thing written at ZH in a week. Good work.

Anonymous's picture

Considering that nuclear power uses FISSION of uranium. I'd have to agree.

Anonymous's picture

well if the chinese are motivated by their internal problems it still doesnt change the outcome. they have the ability to start a messy financial fight- but it's mutually assured destruction, which works great! kept the peace during the cold war. And it does require a good bit of posturing and scary talk.

And the Chinese long term strategy is like the US's in the cold war- just huff and puff and bluff the other guy into spending big bucks on military until they are bankrupt. China wants to hoard the cash, and be the last one standing. so they do NOT want to actually start a fight with the US- the fireworks would be spectacular and both countries would be ruined. Even a limited financial conflict would use up a lot of their reserves.

Instead they just have to keep their cool and manage their RE bubble somehow (bailouts. they can afford it.) while the US burns thru our credit lines an order of magnitude faster than anyone else. Per current us budget projections, another decade should be enough to finish off US treasuries, after which the US government starves, and another decade after that our weapons systems become obsolete.

Unless of course war breaks out and the rest of the world is destroyed again like in WWII and the US comes out on top again...

Anonymous's picture

Yes, something smells funny about China's recent hysterics. I think it may have to do with the transition in power coming up in 2012. I think hardliners are re-asserting power. 'Market Wu' warned of this recently.

Catullus's picture

Agreed. This highlights domestic Chinese turmoil than anything else.

The US State Department has been setting this for years with demanding that China revalue its currency.  That was never in the US's interest and they knew damn well that China would never do it.  So why press for nearly a decade for currency manipulation?

  1. It masks the reason for the level of inflation in the US
  2. It gives the Chinese something to stand-up to the big, bad US empire with.  Look at how they thumb their noses at us!  What a crock of shit.

"Raising wages" instead of currency revaluation in the opposite direction the US wants is a sign they're appealing to the masses in China who've realized they're being enslaved for a lot of worthless pieces of federal reserve notes. 

"Raising wages" is communist code for "we're going to print money".  They're going to dump the bonds to prevent their currency from devualing too quickly versus the dollar.  They won't sell all of their bonds, they hold too much sway with the US Treasury department unless the FRB is truly going to bailout the world. But calm down about this being a trade war, US officials would like nothing more than have blame deflected off them and onto some foriegn threat.

KevinB's picture

You know all those Chinese girls providing "happy endings" in every major city in North America?

Industrial spies, every single one of the bitches. They'll be doing espionage, and sending back info via teh intarweb if we ever try to cut off the flow of tech.

I have extra tin-foil hats if you need them.

Anonymous's picture

We will always prevail.
We have more gold than they do. If the bankers stole that too then we will say we have more gold and just bring it to true value and back the buck with gold or some composite. www.jsmineset.com so gold to 1600+?

Anonymous's picture

So what does this mean for the stock, treasury, and bond markets?

Anonymous's picture

So what does this mean for the stock, treasury, and bond markets?

Anonymous's picture

this is not it. wait for treasuries dump.
that is not directed vs eu, that part of destroying is your doing.

agree with them loosing hope. no you can t.
no change. wait for the eu loosing it too... not far away now / "svift" vote coming up.

Anonymous's picture

O.B. admin. has egg on there face. Backing down to China will make him look good just like when he Bowed down to the King in Saudi. He is getting used to the idea of bending over. Yep he will back down and take the missiles out to save face. What a wimp and the world laughs at him.

Arthur's picture

Better now than ten years from now when China would have owed all our machine shops and repatriated all their US educated PhD’s.  I hope China starts an economic fight now, while we can still handle it.

China only cares about China and those in charge of China worry about keeping a lid on the 55 different ethnic groups that make up the country’s population.  Their, not unreasonable goal, is to restore China to its historical position of dominance.

A command and control economy can work wonders in the short term.  Capitalism can win if there is a little government guidance.   Many businesses have made money by establishing plants in China but the long-term cost is over looked.  The price of entry into China has often been a transfer of our technical knowhow.  As illustrated by Google recently, the Chinese have been actively stealing all the military and industrial information they can for years.   The USA has been under attack from China for years now and it seems that no one in authority has cared.  Just because they are not firing guns does not mean there is not a battle going on.

It heated up under Clinton and the Bush administration did nothing, seemingly, content reap the short-term gains of cheap Chinese labor. 

Until and unless China opens up their markets (and politically they cannot) any business dealing with China should face the same restrictions placed on businesses who wanted to deal with the Soviet Union in the old days.  China does what is best for China.  American business does what best for each business, which is not the same as doing what is best for America.

Anonymous's picture

Yawn.

The tide is going out, and China forgot their bathing suit.

scaleindependent's picture

 

This means the Chinese will veto any more monetization of US treasuries. IIRC, they allowed the Fed to buy UST early in the recession, but stated that it would be only until the US economy was growing again ( >5% GDP anyone?). Now with the financial saber rattling and angry Chinese generals and stuff, no way will they allow further monetization of their almost trillion US dollars in treasuries.  What does this mean for US mortgage rates, even if the Fed continues buying MBS?  Rates are gonna go up, unless the markets crash and scare everyone into UST.

If the Chinese follow thru on their verbal brinksmanship,  buying SRS may be a good idea.

moneymutt's picture

when politicians face a choice between ticking off foreigners or ticking off domestic folks, they always pick foreigners...Fed will monetize all they want if they think it will keep the domestic hoards at bay...

Gordon_Gekko's picture

It's about goddamn time.

Burnbright's picture

Gordo buddy, been missing your presence.

Benthamite's picture

Gordon,

Separately from the content of this article, I came across a fragment of an article elsewhere that echoed your sentiment about the relationship between Al Qaeda and the CIA.  To quote:

But Fowzia, a Harvard-educated neurologist, was frustratingly short on hard information. She responded to questions about Aafia’s whereabouts between 2003 and 2008 with cryptic cliches. “It’s not that we don’t know. It’s that we don’t want to know,” she said. And she blamed reports of al-Qaida links on a malevolent American press. “Half of them work for the CIA,” she said.

 

The background is that of the case of Aafia Siddiqui, if you've been following at all.  Anyway, was compelled to mention something.      

Anonymous's picture

I think all too many view China through the prism of Western ( read US ) perceptions. Pride comes before a fall and you only have to look back at the long and painful decline of the British Empire to see how slowly new realities sink in.( and I would reference more than a few of the ZH commentators for evidence of this proclivity) The US is close to a failed state status in terms of its political system......gridlock may prevent some of the worst excesses, but it also acts just like a deer in the headlights to the gathering fiscal armagedon. China has its strong nationalism and desire for global respect to provide some of the sustaining cohesion the US sorely lacks right now.(ok, maybe not long term----but you know what Keynes said....) I think China`s command economy will muddle through better than the western economies with their `no-one left to fail` mentality.

Glen's picture

Well the futures markets are taking in their stride; S&P -0.8 and Dow +2.

Tic tock's picture

It looks like this week is going to be full of soft, fat men throwing out outrageous insults into the media... seeing which way emotions are running. ..

...Banks are not businesses. They facilitate business and keep a .25% fee on year end balances. Investment banks earn their profit, by way of differentiation. Central banks have shown that they are unreliably designed to step in and act as a mother institution wrt retail money flows.  These are not Bishops and priests, more like gardeners and priests.

Secondly, what the government does and says -is our business. The decision is yours.

Anonymous's picture

So, that will be Larry Summers doing the insults,
right?

Handle with care's picture

This is interesting if true and makes sense as preparation for an economic war.

By restricting their US assets to those that are guaranteed by the US government they maximise the effects of future warfare and minimise the collateral damage to themselves

Once the preparation is finished they can sell the treasuries, severely destabilising the US government and weakening the currency and causing massive US dollar printing leading to further US dollar decline.

 

So the end result is a stronger Chinese currency, possibly even a new reserve currency, that allows them to buy the food, oil and other commodities to allow their people to enjoy the advantages to a raised standard of living that the US has enjoyed in the postwar period.

 

They will be a strong nation able to provide its people with a high standard of living and the dominant economic power around the world leading to greater soft power than the crisis struck US.  The US will still be a major military power, but with no military moves by China that force will be unuseable and will now be sitting on top of a much shrunken economy and its foreign bases paid for with a much weaker currency and all teetering on a manufacturing base, that due to several decades of outsourcing, is in an even worse position to rebound than that the US benefited from when it was the intact manufacturer and all its competitors has their industrial plants smashed.  At least after WW2 Europe and Japan still had a population with skilled people who knew how to manufacture and engineer instead of a population of excel spreadsheet magicians and real estate brokers.

 

So to summarise a plan to become a superpower in competition against a nuclear armed power.

 

Step 1:  Keep the currency artificially low, suppressing your own population's standard of living for several decades, but leading to the shifting of your competitors manufacturing base to your territory

Step 2:  Provide easy credit to your competitor so they become economically more vulnerable

Step 3:  Remove your exposure to all forms of your competitor's debt except their government debt

Step 4:  Pull the plug on your competitors government debt

Step 5: Enjoy the benefits of being the world's largest intact economy, strong currency and currency reserve status producing a high standard of living for your people.

 

Sure they'll lose a trillion or so in dollar denominated terms, but they'll gain from the value of everything in China being more valuable from the rise in their own currency.  And even a trillion is still a lot cheaper than the scale of shooting war necessary to alter the balance of power

Eally Ucked's picture

"The US will still be a major military power" - who will lend the money to keep it that way? Up until now they were supplying the money knowing that all those funds will be wasted in both wars, so US is not stronger militarilly but debt has grown, maybe we should have one more war e.g. with Iran or Pakistan?That would speed up our decline.

moneymutt's picture

if it makes Rogers right, I'm not buying it..

Anonymous's picture

Even China's long march has a stumble or two in it. Whatever the regional opinion of China and Chinese was, it is deteriorating. First, China has cannibalized a lot of low tech industries from the rest of Asia and hurt those economies, making few friends in the process. China has also spread a lot of its pollution to places where it rapes...er, mines natural resources in exchange for bribes to officials. Third, the degree of arrogance exhibited by newly emerging, newly rich people is never endearing and quickly grows old. The growing resentment alone is going to hamper China in the future, never mind the mistakes it is making at home (pollution, excess capacity, corruption). The path to glory will not be a straight line.

If China is the future, here is a little of what it might look like:

Years ago China began extracting the resources from its neighbor Burma. In northern Kachin State (Burma) China mined jade, cut down vasts swathes of teak and other hardwood trees, and used horrendous amounts of mercury and cyanide to mine gold, ruining the ground water and decimating river fish stocks. Birth defects and mutations are on an exponential rate higher.

Now a Chinese SOE is building a massive 150 meter high dam at the confluence of two rivers, the Mali Ka and Mai Ka, at a point called Myit Sone. Fifteen thousand ethnic Kachin were given a bag of rice and a tin of cooking oil and told to get lost. The resulting lake will flood once valuable farmland as well as release massive amounts of the aforementioned mercury and cyanide into what becomes the Irrawady River.

All 20,000 unskilled laborers who will build the dam are being imported from China, and the kicker: every single watt of generated power is going to China.

To top it off, already hundreds of young ethnic women from the area have disappeared, reported to have been kidnapped and sold off in China as brides.

The area is pretty isolated so few people give a shit what happens. CNN is not there so it must not be important.

Yes, plenty of other countries have behaved badly in the course of doing business, but China is taking things to a whole new level. So many on this site like to believe that every single problem in the world is created by the US/Rothschilds/Bilderbergers/Goldman/etc., but there is plenty of shit to go around. China is full of it.

velobabe's picture

yeah all the infertile american woman have all their females, china has made itself a nation of all males. makes sense what you say about having to import brides. the yin gets the yang

moneymutt's picture

thank you, good points...we could write many stories of US backed corporations doing similar things around the world, China is a little easier target in that it is China's regime/govt doing it directly where as west/US has morphed itself to be a bit more convoluted...corporations, banks, IMF, shadow military/drug assistance etc...And Chinese seem way worse with ethnic minorities than US....but either way, wrong is wrong, regardless of who does it: Exxon, CIA, China govt, whoever, its tyranny and imperialism and we regular folks should all band against it in a united fashion.

I think China has a bit of problem coming in their evolution in the central planning aspect...I think it may be less self-correcting than US...not that we have real democracy....

velobabe's picture

do you read the automatic earth. it is good.

http://theautomaticearth.blogspot.com/

It wouldn't surprise me one bit if the main consequence of the Greek issue as it plays out today is not the demise of that country, or of the Eurozone, but instead a dramatic acceleration of the world-wide financial truth-finding process that has been lying dormant far too long inside faked balance sheets, moldy bank vaults and make-’em-up-as-we-go accounting standards. Most of those theatrics can only exist as long as they're not exposed to daylight. And that's precisely what Greece may provide us with: a trigger to start a process, a reason to acquire a clearer view of reality.

moneymutt's picture

not to be too trite, but eventually somethings got to give, but Sept 2008 happened about 8 years after I thought it should, so I hesitate to hope...thanks for the aearth ref, been there a few times but do not frequent...like when people post links...learn much from them..

velobabe's picture

have you found leo, yet?

aus_punter's picture

what a complete load of shit this story is !

 

aus_punter's picture

in no particular order

-the source is a news aggregator site from Thailand that is speculative at best

-the rest of the world appears to have miised it

-there has been no reaction apart from a moderate strengthening in regional indices today

-the DXY is trading up

 

.... i think you get it

Anonymous's picture

Speaking about dollar and the FED, it seems Ben did not fall short of inspiring Wall Street 2 scenarists...

"“When business in the United States underwent a contraction... the Federal Reserve created more paper reserves. The excess credit spilled over into the market triggering a fantastic speculative boom... “"

the script:
http://www.scribd.com/doc/19529399/Wall-Street-2

Anonymous's picture

But what happens to equity markets?

Yes We Can. But Lets Not.'s picture

This is Heavy.  China's sayin' "How You Like Me Now?"...

http://www.youtube.com/watch?v=fEJypkRk9IA

dan22's picture

In the beginning of 2009 the six-month futures price for oil was US$ 20 higher than the spot price. Investors faced huge losses unless spot prices rose. A wide gap between spot and futures prices increased inventory demand as arbitrageurs sought to profit from the difference between warehousing costs and the gap between spot and futures prices. That demand flattened the price curve and limited losses for financial investors. Without inventory demand, financial speculation doesn't work.

6. China's bank lending has driven speculative inventory demand for commodities, Chinese banks lend for commodity purchases, allowing the underlying commodities to be used as collateral. These loans are structured like mortgages.

7. The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

8. For four decades before 2003, fine iron ore prices fluctuated between US$ 20 and US$ 30 a ton. As ore was plentiful, prices were driven by production costs. After 2003, Chinese demand drove prices out of this range. Contract prices quadrupled to nearly US$ 100 per ton, and the spot price reached nearly US$ 200 a ton in 2008.

9. China's steel production capacity has skyrocketed, even though capacity is fragmented.

10. China's local governments have been obsessed with promoting steel industry growth, which is the reason for fragmentation. Huge demand and numerous small players are a perfect setup for price increases by the Big Three miners, which often cite high spot prices as the reason for jagging up contract prices.

11. Numerous Chinese steel mills simultaneously want to buy ore to sustain production so their governments can report higher GDP rates, even if higher GDP is money-losing. China's steel industry is structured to hurt China's best interests.

12. As steel demand collapsed in the fourth quarter 2008 and first quarter 2009, steel prices fell sharply. That should have led to a collapse in ore demand. But the bank lending surge armed Chinese ore distributors, giving them money for speculating and stocking up.

http://israelfinancialexpert.blogspot.com/2010/01/50-facts-about-chinas-bubble-economy.html

i.knoknot's picture

if there is a risk that the US is going to 'invalidate' the treasuries held by the chinese (ala KD), or any sort of escalation of econ war, wouldn't it be wise to 'gently' exit your normal market holdings before hammering the government? I can only assume that the US gov will freeze all assets (or something) if/when the fighting gets heavy.

In this game, if i was putting on my boxing gloves (china), I'd be telling my best friends to get their butts on the other side of the ropes, ASAP...

hmmm.

Scooby Dooby Doo's picture

looks like those china people started buying equity futures at about 4 in the morning. lol. the big sell-off.

Instant Karma's picture

I like the Chinese plan. Raise their workers pay and shave a little off their cost of production advantage. With more Yuan in their pockets, the Chinese masses will be able to consume more, which is a positive for anyone selling stuff in China, or selling commodities into China.

Maybe if they dump some fixed income securities I can get more than 0.05% from my bank.

Anonymouse's picture

Is there still debt in the US that does not have a federal guaranty?

jplotinus's picture

How come in the 100 comments so far there has been scant mention of the 13 percent increase in minimum wage in eastern China’s Jiangsu province that Chinese workers are to receive?

That is huge. 

Instead of revaluing the yuan to make Chinese exports more expensive, they're giving workers a huge pay increase instead.

In other words, the Chinese economy is in a position to provide pay increases, boost its economy and building upon, rather than dismantling, its middle class.

Wow!!