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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suteibu's picture

I've been reading the comments as well and arrive at the same thoughts.  It seems to me, given the Yuan peg on the USD and the fact that the Yuan is basically a closed currency, they can raise wages and print money by the junk-load to drive consumerism in China.  Additionally, China is now Japan's biggest trading partner and technology is a major component of that trade.  They are also expanding, along with Japan, rapidly into India.  Perhaps the US has been sitting on its ample laurels for too long.

Anonymous's picture

13% increase in wages. That shoulda oughta be at least another billion of them golden pandas going into circulation in year of the panda. That is if the story is at least partially corrrect.

Anonymous's picture

If they've got us by the balls--and they do--why bother holding on to anything else??

Trifecta Man's picture

That does it!  It's time for retaliation.  I'm going to cancel my order for those World Champion Indianapolice Colts t-shirts.

IveBeenHad's picture

fuck you gotta hand it to china... step for step they are facing off w/ the usa and appearing to have the edge in each showdown.  this does not sit well w/ me as an American. 

Grand Supercycle's picture


No more counter trend rally: the SP00/DOW downtrend and the USD uptrend reasert their dominance yet again.

This is very bearish for equities.

Jim in MN's picture


Goody goody gum drops.  We need to get back to a sane interest rate policy and if some external force takes the Fed's popgun away (or just overrules it, same diff) I say so much the better.

We need to pay the tab that the Reagan-Baker-Clinton-Rubin jerkoffs have run up through insane financial policies over 30 years.  Just look at any chart (LINEAR not LOG) of the Dow and you can see the scam in large print.  It will take us 20-30 years to do it, with increased savings and flat real returns across all major asset classes.  Standards of living will be lower, duh.  But the elite is intent on making it so much worse and perhaps crashing the plane in the process.  Screw them. 

Get any asset you value away from the NY-DC cabal.  Refinance with local financial institutions.  Replace the economy, ignore the government.


Anonymous's picture

Salary increases are certainly the way to go for the Chinese at the moment. By changig the currency parity they would implicitly set off a restructuring of their industrial base, away form extreme export orientation. Currency undervaluation is by the way not such a tremendous booster of exports ( - a.k.a. "dumping" attack) as is often alleged. Supposing that all the implements of an expöorted product were first imported (and thus at an artifially higher price) both effects would exactly cancel each other out and any still remaining competitivenes would then obviously be due to lower wages and/or land prices/rent. And in this somewhat extreme example the appreeciation of the currency would have zero net effect on competitiveness. But, as was said, it would require painful readjustments of the structure of industry since the cost composition in each product is different thus rendering some still more, others less competitive, even on the domestic market! Raising salaries instead means adjusting the other of the three screws (land, labour and terms of trade) so the effect for exports is similar, but it has a great advantage: China has several bubbles in stocks and real estate going. In order to not too abruptly deflate those (with dire consequences) they had better increase purchasing power (not that I condone any such policies over a free market aproach).

carbonmutant's picture

Interesting quote from the Asia Times...

"[Obama's] opponent is China, not senatorial republicans."

moneymutt's picture

is there anyone that is not Obama's opponent? hope Bo likes him...

carbonmutant's picture

Well he's spent hundreds of $Billions in his pork barrel stimulus plan last year that should have bought him something...

Is congressional support that fleeting?

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