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Chinese Stealth Treasury Purchasing Continues
A week ago we speculated that the mysterious "direct auction bidder" may be China, purchasing Treasuries indirectly though offshore money centers. Yesterday's Treasury International Capital data confirms that there is something strange happening with China treasury purchasing, and adds more fuel to the speculative fire that China is in fact acquiring Govvies through less than overt pathways.
The TIC data released yesterday showed a surge in Treasury buying, with foreigners purchasing $118.3 billion in Long-Term Securities (Bonds and Bills). As the chart below demonstrates, this was a record monthly purchase amount in the LTM period.
What was strange about this data point, is that European investors accounted for well over half of purchases, at $68.1 billion - also a record monthly amount. Of this, the UK accounted for a whopping $50.6 billion, and France also buying a sizable $11 billion. Accounting for all Bill sales in November, foreigners offloaded $18.9 billion in short-term securities yielding next to nothing, after selling $38.3 billion in October. Furthermore, as we speculated, paydowns added to run from short-dated securities: $134 billion in bills were paid down in October and $8 billion in November. While forigners no longer flock to Bills, their holdings of the low-yielding asset class is still elevated at well over pre-crisis levels:
On this backdrop, China was a purchaser of just $14.9 billion in Notes and Bonds, while at the same time it sold $24.2 billion in Bills, for a net outflow of $9.3 billion. This is confirmed by consolidated holdings data, which saw total Chinese holdings drop to $789.6 billion in November from $798.9 billion in October. China's aversion to Bills is indicated in the chart below, yet it still has a long way to go before it reaches its 2007-2008 holdings of the short-end. In November China held $109 billion in Bills, down from $133 billion in October, and a peak of over $200 billion in May 2009. As the country's Bill portfolio matures, we expect an accelerating reduction in China's holding of Bills, especially if ongoing selling interest does not decline.
We will provide a more in-depth analysis of global fund flows in November later, although we are troubled by some odd revision to October data, particularly as pertains to short-term treasury holdings by the Channel Islands and the Isle of Man, which we are currently trying to reconcile.
Focusing back on China for the moment, among other things the country was a net seller of agency debt for the 17th month in a row, offloading $3.4 billion in the class. China also sold $146 million in corporate debt while buying $393 million in US corporate stocks: a token amount on both sides.
Yet what is most odd about China, as we pointed out previously when discussing Chinese FX reserves, is that while China grew its reserves by $55.7 billion in October and $60.5 billion in November, over the same period, it saw its net holdings of US debt decline by 9.3 billion: a $126 billion differential.
As has been widely speculated, China could simply be diversifying away from the dollar, although a $126 billion net purchasing of a UST alternative would likely have had much bigger repercussions on commodity prices globally in the October-November time period. Yet, as Market News points out, this fact does not explain the stability of the CNY, coupled with the ongoing positive trade surplus. Market News' explanation:
First, it is possible that China is making purchases through other financial centers. The UK's holdings of US Treasuries rose USD47.4bn in November, and Hong Kong's holdings also ticked up. If a portion of those holdings can be attributed to China, that would explain part of the disparity between strong FX reserve growth and weak growth in Treasury holdings.
Second, Federal Reserve custodial data, which has a different coverage to the TIC data, shows a solid increase in US Treasuries held in custody for foreign official institutions in October and another smaller increase in November.
Zero Hedge will analyze Fed custodial account data shortly, to determine the nature of the noted discrepancies. Yet the original question does stand: if indeed China is accumulating Treasuries in a covert fashion that bypasses a "smoking gun" appearance on TIC data, why is it doing so? Who stands to benefit from this kind of indirect purchasing via "direct bidders"? The explanation that public and private bidders originating from the UK are accumulating US debt deserves much greater scrutiny: the buyer is certainly not the BOE, which has had its hands full monetizing its own gilts for the past several months (and yes, unlike the Fed, the BOE has no problems admitting it is directly monetizing). And Europe in general is now a funding basket case, exemplified by the events in Greece: the last thing European Central Banks will worry about is funding the U.S. exploding budget deficit when they have a ticking time bomb in their own back yard. So whether the U.K. is merely a hub for offshore purchases of US bonds, whether originating from China or Petrodollar countries, is unknown. If the buyer indeed is China, we raise the same question we did a week ago:
The Fed has now informally offloaded the Treasury portion of
Quantitative Easing to China, which does so via the elusive Direct Bid.
It also explains why the Fed has generically been much less worried
about TSY purchases under Q.E. (a mere $300 billion out of a total $1.7
trillion in monetization). It does beg the question of just how much
Chinese holdings of US Debt truly are, as this number is likely
hundreds of billions higher
than the disclosed $799 billion.
If true, this would imply that the UK "holdings" of $278 billion are highly suspect, as the country likely own a fraction of this total, with the balance held by Chinese and Petrodollar interests.
One thing is certain: if someone is trying to hide their purchases, this is never indicative of a good thing, and much more analysis must be performed to determine just why international fund flows need to be below the radar.
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China knows how to print money too. These covert purchases are a testament that if China were to de-peg from the dollar, the Yuan would collapse (they're buying treasuries, commodities, stimulus packages). There's a lot more Yuan out there than the peg would have people believe. This is just a round-about way of perpetuating the trade deficit without raising eyebrows.
Re-do your math.
China was a historical buyer of dollars to hold down its currency. China limited its purchases to the level of its trade deficit with the US.
Thus, if China stops pegging, it is the USD that declines.
I understand that, but my point is that what you see isn't necessarily what's actually happening.
Both countries are printing money; that which prints more will decline against the other on a relative basis.
I contend that the assumption that a China depegging would cause the Yuan to appreciate against the dollar to be false, primarily b/c most of the statistics about China are entirely fabricated (8.5% GDP growth my a**). I think it is a fair assumption that they monetized a lot more than is realized in the marketplace. This would also explain why they would be secretly purchasing treasuries instead of just dong it outright.
I am sure many of the Chinese statistics are false. Likewise, for the US.
Here's a statistic that isn't false...
US = massive debtor
China = massive creditor
Let's say you, China, make Pencils and Calculators. You lend me (USA) a few pencils, which I then use to purchase a calculator from you (China).
The end result: I (USA) have a calculator (and I owe you a few more pencils, aka interest, I don't have), and you (China) are short 1 calculator.
Seems to me like the debtor is coming out on top. China is less 1 calculator, or if we value its goods in currency, their currency has been depreciated vs usa.
Can I suggest that you back up a bit and consider the perspective which you use to come to your conclusion? As an example, consider taking the perspective of one of the Chinese rulers.
If you were among the Chinese elite, you'd likely view the US as being in a late phase of the empire lifecycle. Also, you'd tend to view yourself as being a rising power. In this mindset, there is no reason to presume that you would want to buy USD, except for the following. China has traditionally bought USD at a rate commenserate to the US trade deficit with China.
The US budget deficit is now much greater than the US trade deficit. The budget deficit / trade deficit relationship was steady for many years. This pattern broke in 2009.
As to being short electronics (calculators), no worries, Moore's law says that electronics are a great short.
However, in all seriousness, I don't get the point of your pencil/calculator example unless you are using it to explain why China would not buy US govt debt.
The point is that China is buying from itself. It's the same thing if China stopped using USA as an intermediary and just printed money, gave it to its citizens, and made them buy the stuff themselves. It's unsustainable, and the end result is currency devaluation.
So your description of China's behavior (if it were the secret buyer) is that China is doing something stupid?
Wouldn't it make more sense for China to just buy huge stockpiles of coal, iron ore, oil, copper, etc...?
They're doing that too.
>It's the same thing if China stopped using USA as an intermediary and just printed money, gave it to its citizens, and made them buy the stuff themselves. It's unsustainable, and the end result is currency devaluation.<
Isn't that a pretty good definition of QE 2?
QE 1 was stealing money from us little people, and giving it to the richest 10,000 people in the world.
And if you believe your own description, you have described a country (USA) that is entering a period of extreme inflation.
It is not logical to buy the currency of a country that is going to have extreme inflation. The rulers of China are not stupid. Thus, they are unlikely to be "secret" buyers of USD.
If you plan on kicking the can down the road instead of dealing with the problems now, then it is 'logical'.
Well, that depends on your frame of reference. What's smart for a politician is not necessarily prudent for the citizens.
Either way, somewhere in this discussion we got sidetracked. My whole point is that the level of monetization by China maybe far greater than people think and that a depegging from the dollar may in fact crash their currency. That's precisely why they're hording real assets as well.
Yes it is true China is also printing to "compensate" for US printing. But in the process above China is accumulating forex, while the US is accumulating consumer goods. If you are going to defend you currency compared to the other which is better equipped on the forex market?
a) The US: having second hand consumer goods held by the public to buy USD.
Or
b) China: having USD to buy RMB? :-)
And that's the clever bit.
The US is desperate to devalue the USD, but the RNB currency peg means that whilst the USD will devalue against all other currencies, it cannot shake off the RNB.
Why? Because the Chinese are keeping pace with their RNB devaluation.
Keeping pace? Looks like they're in overdrive: http://www.zerohedge.com/article/chinas-economy-overheats-q4-real-gdp-rises-107-yoy-rumors-interest-rate-hike-media
Haha, you should begin worrying when China starts to sell you.
Another thought- As our largest creditor, China may well be in a position to dictate terms of the default.
How would they do this? what cards does China hold that will let it dictate anything and not get horribly horribly burnt?
There is no particular reason to presume the buyer is China.
An unknown buyer could just as well be Treserve monetizing.
On the otherhand, perhaps the buyer is http://en.wikipedia.org/wiki/Snuffulluffugus
This is a joke.
Welcome to...
http://en.wikipedia.org/wiki/RMS_Queen_Elizabeth_2
As in the late Roman Empire, the govt prints what it needs to pay its bills. As with the ex-Cunard liner, the action is invisible only if you close your eyes. BTW, sitting in a metaphorical drydock, all this is going to do is propel us a little closer to Weimar-lite (if we're lucky, Weimar-heavy if we're not).
(If the joke is too obscure, you probably shouldn't be reading this site, and the answer is welcome to qe 2.)
China has always bought some treasuries through GB and HK, that's an open secret. Brad Setser has often written about it.
In the runup to almost every sovereign financial crisis, whether liquidity or solvency-driven, the debtor undertakes increasingly desperate machinations to place the debt with domestic banks, other friendly financial institutions, etc.
Korea, Argentina, Mexico, Thailand, Russia...
Seems like they're trying to keep the dollar low by showing an apparent lack of interest towards it. Lower dollar = increased market share of chinese goods in other countries which they need in order to compensate for fall in US demand in order to keep their millions of migrant workers employed (since that is their only real fear). Even considering the fall in exports to the US, they still have a significant volume of dollars they need to park, so they do that covertly to keep the image of low interest/confidence in the dollar.
Deficient Market,
BINGO....you nailed it. The Europeans are mad about it. You will see in the FEB/MARCH TIC report.
The CB currency SWAPs are also reined back so we will see a stronger USD from here.
Your wrong there. The real fears of China 1)how to
feed a massive number of people with no arable land to
speak of and fresh clean H2O. Their rivers are so
polluted at this point from their massive upgrade
they rely on the run off from the Himalyans as their
source of clean water and now the ice packs are
diminishing. Presently there are 1.8mm college graduates
looking for a job for more than one year in China they
have plenty of migrant jobs now for those who want it
if they have to. Lastly strangely enough who do they
hate with a true passion? Vietnam. I forget their explanation. I thought it was the Japanese turns out they are #2 on their hit parade. Conversation in 2007 not
much has changed.
.
De-pegging will only result to the upside for the CNY due to the US trade deficit and so USD's must be swapped, recycled or in this case, laundered out of their system in exchange for Yuan. They can't stop it. They're hooked.
IMO, the PBoC is trying to save face amongst their people by not suggesting they are in support of the US, but ofcourse it knows very well the partnership must be maintained for their own good and so the act continues on the sly.
Wow.
Let's recap:
"I wouldn't buy Treasuries with YOUR 401k"
"Gold Bitches!"
Yep, keep explaining away, creating conspiracies in the wake of your being wrong about Treasuries. Effectively ZeroHedge has claimed victory just before they were completely wrong and then keep reinforcing their viewpoints with more conspiracies.
No wonder why you need ad revenue, I sure hope you aren't trading your beliefs.
-----------
Damn, okay I feel a bit bad about that. Seriously though, this entire China conspiracy is just flat out ridiculous and pandering for an idea when there is an obvious rotation into Treasuries from some outside sources who are probably saying "Hey, let's hedge some bets now that we are up so high" Seriously, why purchases 0.05% yielding equities with drawdown potentials of 80%+ or a 4.5% asset with a drawdown of 10%~20% but an upside of the same that would offset others?
You talk about pimco selling off bonds, but hey, it's still the #1 asset holding.
Seriously, you know the negative side of higher rates, whoever you are TD, you know that greater inflation occurs when the interest rate goes higher but asset prices do not move correlatively and you know that refunding costs will bankrupt us very fast. Why do you continue to bash treasuries and push people away from them? All of your other stories are amazing, but you guys are flat out wrong here and you continue to pound this table wayyyyyyy too fucking hard for my taste, leading me to believe there are alternative implications and that's something I really don't want to believe.
You are never dedicated to something you have complete confidence
in. No one is fanatically shouting that the sun is going to rise
tomorrow. They know it's going to rise tomorrow. When people are
fanatically dedicated to political or religious faiths or any other
kinds of dogmas or goals, it's always because these dogmas or goals are
in doubt.
~ Robert Pirsig
----
So, who is buying T-bills?
*sigh* banks and mmf's (to sustain cash in/out flows as given by reserve requirements due to the high cash levels of clients), but that's not what the article is regarding, he's talking about the long end of the curve. I'm not even hypothesizing on that one, but I also know that the yield curve was at record wide spreads, there is the chance that people are leveraging the chance of a dip. As people move into cash, treasuries need to be purchased by banks.
Can you provide speculation-debunking facts for your claim of "obvious" rotation from outside sources? While you are compiling data, take a look at hedge fund UST purchases in November: both Bills and Bonds.
starting now, be back with info soon soon.
Tick tock on the clock
But the party don't stop
No oh, oh oo whoa oo whoa oh
Oh oo whoa oo whoa oh
Oh oo whoa oo whoa oh
KE$HA
lol.... I don't pull statistics out of my ass like most commentators on this website, most likely I'll be done by saturday or so... but I'm already down to the $270 billion zone (which matches the ZH observation of the increase in China FX reserves, but doesn't take into account the China FX swaps established in 09, still searching through Fannie/Freddie quarterly reports.
Here's some swap articles -
Hong Kong = http://www.hketousa.gov.hk/usa/press/2009/jan09/012009.htm (US$29.1 billion)
Belarus - http://news.xinhuanet.com/english/2009-03/23/content_11058111.htm (14.7 billion U.S. dollars)
Gee, that does bring it below where I'm at in missing Treasuries though.
*yawn* Plus, I like watching tv as I sit on my ass and make cash being long treasury bonds.
Oh yeah... it's called "googling"... Okay, Leverage is on now.... Gina Bellman is such the fox, been keen on her since "Jekyll" - Great damn series
Thanks for the effort, man.
Step back a moment. As early as 2006 China's central bank
was disturbed by the cottage industry developing
around their every move in the tsy market. Stop being
ambulance chasers. Many if not all central banks are
diversifying their dollar holdings that is just prudent
risk management. Many are doing more business in other
countries, Canada for instance from a global perspective
is in better shape than us right now. Russia just
announced they are allocating a greater portion of their
portfolio to Canada both currency and investments. It
makes sense like minds think alike and they are both
commodity based economies. At this point China is fed
up with being under the microscope. "Tyler" sometimes in
your quest to be analytical you get more granular than
necessary. Think occam's razor here.
Do you know who 'doubts' capitalism and sound currency? The Powers That Be. They are the ones who believe the sun rises only because they summon it. And theirs is the religion anyone adheres to, who believes the government is going to solve our problems.
Gold is not sound currency when bankers own it all. Silver on the other hand, would be since the quantity is too large to manipulate.
Here's the deal. It's no secret that China will invade Taiwan at some point this decade. The U.S. has indeed been stepping up its supply of arms to Taiwan. China is secretly building up its Treasuries in order to threaten the U.S. with a mass sell-off if they interfere with them when they take over Taiwan which they consider their property anyway. Of course, if China were to sell its Treasury holdings in a large way, interest rates would skyrocket and we would have the late 70's all over again. My guess is gold is anticipating this coming conflict...
China is a long way off from invading Taiwan.
Pointless wars (as in achieving nothing) against minor powers are undertaken during the declining phase of an empire.
However, if you can explain why China would invade Taiwan (beyond for bravado, bragging rights, etc...), I would appreciate it.
China already has a buttload of Treasuries - enough to exercise the nuclear option on the. They don't need to accumulate more, and it still doesn't explain why they'd be doing so covertly.
Why would they want to do that? They already have the benefit of Taiwan's investment in China...
Actually the CCP was particularly smart, they would offer the KMT the chance to participate in mainland politics as a permitted second party. Poof. 'democracy' arrives in China.
It is more likely for the US to invade Cuba this decade than China to invade Taiwan.
1. They don't need to invade Taiwan. Economically Taiwan is already doing what China wants - transferring technology.
2. The Japanese and Indians are more useful for "not-us" rhetoric.
Main problem China has with Taiwan is that is has a controlling influence over north/south sea lanes. Any conflict over these might lead to some form of armed warfare. I still think this would not be an invasion.
It is more likely for the US to invade Cuba this decade than China to invade Taiwan.
1. They don't need to invade Taiwan. Economically Taiwan is already doing what China wants - transferring technology.
2. The Japanese and Indians are more useful for "not-us" rhetoric.
Main problem China has with Taiwan is that is has a controlling influence over north/south sea lanes. Any conflict over these might lead to some form of armed warfare. I still think this would not be an invasion.
I wonder what the "quid" side of the "quid pro quo" equation looks like if the Chinese are buying treasuries (i.e., the "quo").
(S)quid, perhaps?
"squid pro quo": euphemism for a fiat currency; issued with no gold backing
Tyler...thank you very much for continuing to investigate this important matter.
They seem rather willing to loan us the money so that we can purchase the rope by which we'll eventually hang.
These whole think about flexible exchange rates is all nonsense and profits only the banks who make money in forex, and promotes irresponsible policies; After L Johnson and Nixon's butter and guns forced the US to default and abandon Bretton Woods, perfectly good and profitable businesses in the West have steadily gone belly-up because someone else is manipulating exchange rates and the big money-centre banks have become hugely profitable. Bring back Bretton Woods and fixed pegs refernced to GOLD. The world would be much safer place. BUY GOLD.
thank you Tyler!