It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington

Tyler Durden's picture

On Tuesday evening, we asked what would happen if emerging markets joined China in dumping US Treasurys. For months we’ve documented the PBoC’s liquidation of its vast stack of US paper. Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once. 

We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China's devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys. 

But even as the cat was out of the bag for Zero Hedge readers and even as, to mix colorful escape metaphors, the genie has been out of the bottle since mid-August for China which, thanks to a steadfast refusal to just float the yuan and be done with it, will have to continue selling USTs by the hundreds of billions, the world at large was slow to wake up to what China’s FX interventions actually implied until Wednesday when two things happened: i) Bloomberg, citing fixed income desks in New York, noted "substantial selling pressure" in long-term USTs emanating from somebody in the "Far East", and ii) Bill Gross asked, in a tweet, if China was selling Treasurys.

Sure enough, on Thursday we got confirmation of what we’ve been detailing exhaustively for months. Here’s Bloomberg:

China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.

 

Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales, said another person. They didn’t reveal the size of the disposals.

 

The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.

 


 

The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA. The figure was based on the bank’s calculation of how much liquidity will be added to China’s financial system through Tuesday’s reduction of interest rates and lenders’ reserve-requirement ratios. The assumption is that the central bank aims to replenish the funds it drained when it bought yuan to stabilize the currency.

Now that what has been glaringly obvious for at least six months has been given the official mainstream stamp of fact-based approval, the all-clear has been given for rampant speculation on what exactly this means for US monetary policy. Here’s Bloomberg again:

China selling Treasuries is “not a surprise, but possibly something which people haven’t fully priced in,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “It would change the outlook on Treasuries quite a bit if you started to price in a fairly large liquidation of their reserves over the next six months or so as they manage the yuan to whatever level they have in mind.”

 

“By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market,” David Woo, head of global rates and currencies research at Bank of America Corp., said on Bloomberg Television on Wednesday. “China has a direct impact on global markets through U.S. rates.”

As we discussed on Wednesday evening, we do, thanks to a review of the extant academic literature undertaken by Citi, have an idea of what foreign FX reserve liquidation means for USTs. "Suppose EM and developing countries, which hold $5491 bn in reserves, reduce holdings by 10% over one year - this amounts to 3.07% of US GDP and means 10yr Treasury yields rates rise by a mammoth 108bp ," Citi said, in a note dated earlier this week. 

In other words, for every $500 billion in liquidated Chinese FX reserves, there's an attendant 108bps worth of upward pressure on the 10Y. Bear in mind here that thanks to the threat of a looming Fed rate hike and a litany of other factors including plunging commodity prices and idiosyncratic political risks, EM currencies are in free fall which means that it's not just China that's in the process of liquidating USD assets. 

The clear takeaway is that there's a substantial amount of upward pressure building for UST yields and that is a decisively undesirable situation for the Fed to find itself in going into September. On Wednesday we summed the situation up as follows: "one of the catalysts for the EM outflows is the looming Fed hike which, when taken together with the above, means that if the FOMC raises rates, they will almost surely accelerate the pressure on EM, triggering further FX reserve drawdowns (i.e. UST dumping), resulting in substantial upward pressure on yields and prompting an immediate policy reversal and perhaps even QE4." 

Well now that China's UST liquidation frenzy has reached a pace where it could no longer be swept under the rug and/or played down as inconsequential, and now that Bill Dudley has officially opened the door for "additional quantitative easing", it would appear that the only way to prevent China and EM UST liquidation from, as Citi puts it, "choking off the US housing market," and exerting a kind of forced tightening via the UST transmission channel, will be for the FOMC to usher in QE4.

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VinceFostersGhost's picture

 

 

Rut row.

 

No worries.........Obama's son will buy them.

 

Yes we can.

 

Anything?

Headbanger's picture

Yep... Time to raise them rates now...

And start taxing foreign profits cause tax revenues are about to implode

The Pentagon just hates running out of funding...

Antifaschistische's picture

Who bought the 108 B in treasuries?

SWRichmond's picture

Who bought the 108 B in treasuries?

Exactly.  If China is selling, who is buying?  Forex is such a fun market.  And honest as the day is long...

BrocilyBeef's picture

But... DEBT IS MONEY!

 

/sarc

johny2's picture

now if they bought gold for 100 billion or 1 trillion, it would matter. otherwise it is just a number on a screen, or a paper. easy to make. 

realmoney2015's picture

Countdown to Myra: 3,2,1...

Get out while you can.Liquidate your savings. Get into gold and silver while the prices are manipulated downward.

SamAdams's picture

Additionally, China is selling because now is a great time to sell US paper.  It is in high demand as the world economy tanks and US stock market falls.  However, the USA has a sovereign debt problem.  2017 or sooner.

Divided States of America's picture

Now it all makes sense....You dump our worthless treasuries? Well we will blow up some of your cities (Tianjin, Shandong)

McCormick No. 9's picture

Okay, I gotta figure this out:

The US borrowed money from China (China buys Treasuries).

China goes broke borrowing money from itself, and decides to cash in her IOU's.

The US is broke from borrowing money from itself and everyone else, which means the US's IOU's are worthless (The US can't pay back what it owes).

If yields (the interest on the bonds (treasuries) goes up, then the US really can't pay back.

Shit rolls downhill, which means that as the interest rates go up on Treasuries, that pushes interest rates up down the line, (ie at the broke-ass fractional reserve banks), and finally, the broke ass American public can't afford to buy a house made out of sawdust, chalk, and plastic wrap.

If the public is tapped out, well, that's when shit rolls back uphill, as in NOBODY CAN AFFORD TO GROW FUCKING FOOD, YOU STUPID BANKSTER MOTHERFUCKERS!!!!!!!

 

Bilderberg Member's picture

Checkmate?...The tiebeaker will be played against Trump

knukles's picture

So if the Fed doesn't want rates normalized as in bonds being slammed which they can't help, then the only thing left for them to do is to buy bonditos!

QE4EVAH

See,this is what happens to misguided policies, power in the hands of idiots and academics (synonymous)

Oracle 911's picture

Even more pressing questions are:

Did this move ring the bell for the selling for the Arabs to?

When will they begin accept RMB?

Gaius Frakkin' Baltar's picture

After this fiasco, further selling will become more secret than a briefing at Area 51 (even amongst state actors). The teevee will assure you it's all a conspiracy theory and blame the “lies” of conspiracy theorists for the resulting panic.

The9thDoctor's picture

Good luck raising interest rates Yellen!

Moar ZIRP!

Oracle 911's picture

Well this move was mostly a political one.

Which means the Chinese will sell big time and they will publicly admit it. Why?

Because they are pissed, and this is the cleanest way to win this war.

GMadScientist's picture

If someone tells you that your currency isn't good enough to be in the basket, do you improve your currency? No, you knee-cap the rest of the world and ask again!

Rakshas's picture

....I like your style..... make very special wontons for you round eye.... they used to be your nuts...... 

Paveway IV's picture

This isn't about China. They're only a sideshow and doing what they're forced to do.

Psychopaths don't profit or consolidate power from the status quo, only the mafias benefit in those environments.

Psychopaths always use the same plan:

1. Feed the war machine

2. Manipulate the banks

3. Control the military

It never changes because it works 100% of the time, and it will work again. We're all just miserable witnesses to the same orgy of death that they hold every few decades. Psychopaths consolidate power and gain wealth through chaos, pure and simple.

It didn't start with China... it's ending with China.

Wake the fuck up.

Oracle 911's picture

Wrong tense, because it doesn't work anymore. Why?

Nuclear weapons and the fallout form their usage will be here for thousands of years. And also they can't create a working copy of earth biosphere (the failure of the Biosphere 2 project-at least not with publicly available technology).

MontgomeryScott's picture

It starts with ONE THING-

{I DON'T KNOW WHY}.

It doesn't MATTER how hard you 'try'.

KEEP THAT IN MIND. All the Zionists rhyme to explain, in 'due time', all...

[ALL I KNOW]...

OH,...

'I DESIGNED THIS RHYME'... I must have mis-quoted (or mis-heard the intro in the original Lucasfilm F-X version).

 

Yeah. RIGHT.

Fucking 'ROCK WARS' are ON!

https://www.youtube.com/watch?v=eVTXPUF4Oz4

 

If someone tells you that your currency isn't 'acceptable' for the 'basket', you simply design a NEW, SHINIER BASKET that YOU tell 'everyone else' is BETTER (and THEY aren't good enough to be in YOUR NEW BASKET).

IF the baskets are limited to a finite amount of straw to build, the holes or 'open areas' get larger with the size increases, and the smaller stuff falls through the bottom.WTF? Did the 'smart economists' actually get their degrees in 'Advanced Basket Weaving' at Columbia and fucking Harvard? Do they think that plugging up the openings in the bottom with bubble gum actually SOLVES anything? Will the NEXT (YUAN, RENIMBI, RUBLE,  BRICS BASKET OF CURRENCIES) bubble POP, and let the finite valuation go in to FREEFALL, once AGAIN? Does No ONE grasp this concept of 'doing the same thing and expecting a different result'?

DAMN, I guess I'm a 'RAYCISS'. Forgive me. JACK LEW and JANET YELLIN will SAVE US! Podhertz and Leibowitz told Bush the Younger to 'go shopping'... for weapons systems...

 

 

 

Squid-puppets a-go-go's picture

OT, but for how long has the US debt been stuck at $18.2 trillion?

Tyler stopped covering it a year ago or so, and the govt stopped reporting it (prior to raiding social security funds to prevent it rising)

where are we now, $20 T ? $21 ?

Money Boo Boo's picture

QE4EVAH

 

 

also means we the plebeian hoi polloi get to suck on vast waves of inflationary donkey balls 4evah!! , as well. Which we all know eventually leads our children to have to fight and die in yet another bank sponsored WOAR 4evah.

jeff montanye's picture

my favorite part was  “not a surprise, but possibly something which people haven’t fully priced in,”

that is a fine distinction.

Bernoulli's picture

it's all part of a bigger plan

The big treasury dump will come only later as the ultimate final knock-out...

http://www.denk-bubbles.com/what-if

 

 

Ham-bone's picture

In the new ab-normal and with the Fed's desire to creatively engineer "recovery" while pay banks billions more for not lending and soak up unlimited Treasury's others may no longer want...consider...

Rate Hikes and QE...Simultaneously?!? Actually, Yes!!!

http://econimica.blogspot.com/2015/08/rate-hikes-and-qesimultaneously.html

mtl4's picture

I'm not a chess player but I did stay at a Holiday Inn Express last night and checkmate means.....

no more moves = game over

MontgomeryScott's picture

Hi.

I'm Tom Bodett.

Here at Motel Six, the room might have cockroaches and the sheets might have old stains from bodily fluids, BUT; we'll leave the light on for you! (SHIT. Was that an E.M.P.?)

wet_nurse's picture

He'd will be the perfect President.....very familiar with bankruptcy

Dis-obey's picture

 

the fed's henchmen are covertly buying up the treasuries otherwise such a high volume of sales would spike the 10 year note.  Fed QE for China of sorts.  and when the Chinese start to spend those dollars.  the inflation can return to the US.  This is why they are talking about rate hikes.  because the 1 billion + consumers in China have the potential for seriously bidding up US asset prices.  the pieces are in place and it's their move.  Enjoy the low inflation while it lasts. 

FreeMoney's picture

That is probably part of it.

 

Still China has been accumulating US soverign debt for decades.  Some of that must be holding huge gains.  To sell some now is huge profit and gives PBOC a chance to support their currency.

Simultaneously, many south american economys want to hold any currency but their own.  The Bolivar, the Real, the Argintine peso, all are completey cratering internationally, and universally not trusted by their indiginous populations.  I can see lots of people that may consider the USD to be a safe haven in a world full of bad choices. 

Antifaschistische's picture

EXACTLY!!   We know the Greeks aren't buying treasuries...because, the world is now Greece...so they aren't buying.  So, what's the end game?   The US Treasury/Fed does a treasury buy back....then one day we get to just erase 5Trillion in debt?   The Journal Entries on this one will get very interesting.

roisaber's picture

Next... the American Holodomor.

DaveyJones's picture

stupid AND evil

while they don't necessarily, they often go together

glenlloyd's picture

Yeah...well I got a EBT card!!!

/sarc

realmoney2015's picture

We need people in office that understand economics and want free markets. We need people in office that allow banks to fail and won't bail them out or bail them in or force the public to participate in their ponzi schemes. Their is only one candidate in the field that meets that criteria.

That's why I'm donating half of every sale of my candles with silver coins (https://www.etsy.com/shop/ScentSavers?ref=hdr_shop_menu), now through 9/7, to Rand Paul's moneybomb on September 7th.

End the Fed!!!

FireBrander's picture

Rand Paul...lol...he's already lost...you're wasting your money...but doing a great job of pimping your ETSY store...

realmoney2015's picture

Actually im losing money on all of this. Since I don't have much extra money afetr paying bills, I thought this was a good way to help Rand and get the liberty message out. 

Rand is campaigning inAlaska, which votes after Super Tuesday. That shows that he is planning on being in the race all the way to the convention!

 

McCormick No. 9's picture

Poor little Rand. He's lived so long on his knees, he's dying like a male prostitute.

The9thDoctor's picture

Rand Paul is a zionist neocon loser.  Why waste time campaigning for him?

gonetogalt's picture

If I were to participate in the charade, the only person for whom I would vote is Dr. David Duke.

FireBrander's picture

"in the race all the way to the convention!"...yeahhh...Rick Perry has those same "plans"...

Jeb, BUSH (yeah that's his name even though he NEVER says it nor does he want you to hear it from anyone!) is the chosen one...That guy from Wisconsin is the backup.

Trump is fucking everything up for the Republican elite.

Raging Debate's picture

Real Money - He won't win but if he chosen as a running mate it would make me happy.

realmoney2015's picture

You all realize that it is a self fullfilling prophecy to say that Rand can't win. They (you) pulled the same crap when Ron was running. Even though he was the only one gettin to the heart of the issues (The Fed), people wrot him off before they even cast their vote. In reality he had enough states to get nominated from the floor, evenafater they cheated him out of at least 2 victories.

What if people didn't give into the Ron Paul (or Rand Paul) can't win talk? What if we supported the best candidate regardless of what some polls, political hacks, or others say? Maybe we can mass enough support where they cant brush the corruption under the rug. Maybe it would be too obvious to try to cheat.

Giving up will only have one result: more of the same crappy monetary policies. More wars. More welfare. More taxes. More regulations. Less freedom. Less liberty.

palmereldritch's picture

The music played and Rand danced like an obedient puppet.

Too late now that Trump is the DJ and spinning his own tunes. The Tea Party is his now.

The only question if this keeps up is who Trump selects as his VP candidate.  It will probably be a woman and not Fiorina unless she can deliver California (at this stage unlikely so she better start proving her viability as an Apprentice.)

Things are about to get bumpy and entertaining.  Who needs a TV when you have reality like this

dltff-ya's picture

Maybe he could run on the Likud ticket. His dad was a great man. Rand is  lying little weasel  The way he twisted that quote from Khomeini  caused me to stop supporting him.  

Shibumi2's picture

Fuck off with your candle bullshit. If anyone here wanted to support rand McNally  they know the drill.

 

You are worse than the mope who posts about his sister/mother/girlfriend making bank at home on their laptop.