An Expose On Chinese Reserves, PBOC Currency Swaps, And The "Other Investor" Category

Submitted by Phaesed

Recently Zero Hedge did an expose on the increase of FX reserves held by China. The main hypothesis portrayed is that the increase in these reserves might be a function of a “stealth” quantitative easing. While it is functionally impossible to disprove this theory, this article first takes a look at the rise in reserves and then takes a closer look at the original source of the data, the quarterly Treasury Bulletin.

The period in question for analysis of the reserves comes into play in the period between September 1st, 2008 and October 1st, 2009. What should be noted during this period is that between September 1st to March 31st, there were a series of currency swaps established by the People’s Bank of China (PBOC) and several nations, including Japan (USD $29.3 Billion), Malaysia ($11.7 Billion), Belarus ($2.9 Billion), Argentina ($10.25 Billion), South Korea ($26.3 Billion), and Indonesia ($14.7 Billion).  While there was a large flurry of swaps established in late 2008 and early 2009 totaling $95.2 Billion, all activity went quiet after that period. Except for some murmurs of potential deals coming out of Thailand and Brazil, no other deals were announced. Additionally a new large venture is the new Asian venture which seems to be establishing a central bank for that region of the globe, China has personally volunteered $38.4 Billion (USD) to help fund this bank itself. However a closer look at Zero Hedges chart shows that it was exactly during the period after March that the majority of the increase in reserves took place while the holdings of Treasuries remained flat. Unfortunately while interesting and raising several points, this attempt to back into the analysis is unable to refute the claim.

At this point, I needed to turn over and start taking a deeper look at the Treasury bulletin itself and the data presented within. While the initial bulletin posted a large increase in the “Other Investor” category, a look back at this category on a historical basis shows a complete inability for the Treasury to correctly report these items. In fact, over a 7 year period there were constant revisions of this data and more often than not, no mention was given of this data being revised. Please look at the table included below:

So while there was a large increase in the “other investor” category, the foreign investor category in fact decreased the further out that this data was still being released. While this information still cannot refute the China “stealth” quantitative easing thesis, it does raise the question over the accuracy of reporting and why there were such a large number of revisions to all categories.

But while researching this information, I noticed a larger, more worrisome set of data and ensuing questions. The true shocker is in the vast change in internal ownership of US debt versus the amount owned by foreign nations and the Federal Reserve. Between 1985 and 2009 U.S. ownership of the federal debt has decreased from 56% to 27% while foreign ownership has increased from 14% to 29%. Even more shocking is the vast change in the amount owned by the Federal Reserve, from 31% to 44%. During the majority of the Bush administration this percentage was in excess of 50%. Below is a visualization of this relation during this period.

Unfortunately this article cannot refute the stealth QE thesis; however it does raise larger concerns. Namely that Americans are increasing owning less of their country.

Swap links:

Yuan Currency Swaps Established between 10/1/08 and 9/1/09

• 1.    3/30/09 Argentina  - $70,000,000,000 (USD$ 10,250,000,000)
  • http://www.chinadaily.com.cn/bizchina/2009-03/30/content_7630532.htm
  • http://www.marketskeptics.com/2009/03/china-and-argentina-agree-to-currency.html
• 2.    3/11/09 Belarus - $20,000,000,000 (USD $2,900,000,000)
  • http://news.xinhuanet.com/english/2009-03/11/content_10993140.htm
• 3.    2/9/09 Malaysia - $80,000,000,000 (USD $11,700,000,000)
  • http://www.chinadaily.com.cn/bizchina/2009-02/09/content_7456591.htm
• 4.    12/12/08 South Korea (ROK) - $180,000,000,000 (USD $26,300,000,000)
  • http://www.chinadaily.com.cn/china/2008-12/12/content_7299948.htm
• 5.    1/20/2009 Japan/Hong Kong - $200,000,000,000 (USD $29,283,000,000)
  • http://www.forbes.com/2009/03/31/china-argentina-yuan-markets-currency-dollar.html
• 6.    3/24/2009 – Indonesia - $100,000,000,000 (USD $14,690,000,000)
  • http://www.forbes.com/2009/03/31/china-argentina-yuan-markets-currency-dollar.html
• 7.    3/24/2009 Asean Currency Swap Facility – USD $38,400,000,000
  • http://online.wsj.com/article/SB126198744329506359.html?mod=rss_asia_whats_news&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Fxml%2Frss%2F3_7013+%28WSJ.com%3A+What%27s+News+Asia%29
  • I am unsure of how this will affect the  FX Reserves
• 8.    Possible Swaps established Covertly
  • Thailand - http://www.nationmultimedia.com/2009/06/22/opinion/opinion_30105721.php
  • Brazil - http://www.tradercurrencies.com/currency-trading/9441/brazil-china-cut-dollar-trading/
  • Brazil - http://www.cnbc.com/id/31600755
• 9.    http://chinasouthamerica.blogspot.com/2009/04/chinas-currency-swaps-help-expand-yuans.html

Comments

[Marvin the Mind...]

TD, surprised you haven't picked up on Market Ticker's piece on the "mistake" in November's durable goods number ...

[Tyler Durden]

It was tweeted on Friday

[Anonymous]

Ouch grasshopper!

That'll teach ya to mess with the Master.

Fight Club Rules!

[pros]

It's an accounting identity:

increase in foreign holdings of US securities (assuming no central bank intervention, which is the norm for US)=Current Account Deficit (less financial flows),

so increase in foreign holdings of US debt simply represents the foreigners' financing of the excess of US consumption (C) above domestic supply (value-added, Y).

Y +CAD = C + I + G

China can't conduct US QE according to its strict definition, only the US central bank can...

but the general principle holds-China supplies massive credit to the U.S.

[Shameful]

Glad to see you writing here!

Now I agree it is disquieting to see that America's own less and less of the debt and I'm particularly unhappy about the increase of Treasuries held by the Fed.

I'm of the thought that there is no "stealth QE" by China because it would not be QE because they cannot print dollars they must purchase them with Renminbi(trade surplus), and further that it would not serve their appearing goal of asset diversification and commodity accumulation. 

[OBRon]

Hmmm...

Maybe Timmy has the presses running overnight while shipping pallets of new currency directly to China off-balance sheet under an agreement that we provide the cash if China will use it to "Buy American."  That way, China gets all those PC's they've been buying for free while the foreign purchases stimulate our economy with laundered $$$.

And since both businesses and consumers are deleveraging, the Fed syphons off the debt payment streams to remove the liquidity it injected through China as payments against the trash CDS, etc. on its balance sheet.

That way, the Fed shows "income," liquidity is managed, banks are unable to make new loans (while the Fed allows them to play roulette with funds from QE 1.0 used as reserves) thereby minimizing money supply velocity, business is stimulated via exports - devoid of "Cash for Clunkers"-style domestic product saturation/cannibalization.

Voila!  Free Fed window dressing via laundered monetization!  Central planning at its finest!

Nah, silly me.

[Anonymous]

I find it mildly reassuring that Americans are owning less and less of the US debt. It means my fellow citizens are at least marginally smarter than I've given them credit for.

[Tic tock]

Is this the missing link? A Co-prosperity sphere! ..i dunno.. it sounds anti-globalist