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China Officially Sold A Quarter Trillion Treasurys In The Past Year (Unofficially Much More) And What This Means
Back in May, this website was the first to explain the "mystery" behind Belgium's ravenous Treasury buying which in early 2015 had turned into sudden selling, and which we demonstrated was merely China transacting using offshore Euroclear-based accounts to preserve anonymity. Since then theme of Belgium as a Chinese proxy has become so popular, even CNBC gets it.
Consequently, we were also the first to correctly warn that China had begun liquidating its Treasury holdings (a finding which left none other than Goldman "speechless"), which also helped us predict that China is about to announce its currency devaluation three days before it happened as the conversion of Chinese reserves from inert paper to active dollars hinted at a massive effort to stabilize the currency, and thus unprecedented capital outflows.
As a result, the only data point which mattered in yesterday's Treasury International Capital data release was not China's holdings, which actually "rose" $1.7 billion in the month when China actively devalued its currency and then spent hundreds of billions to prevent the devaluation from becoming an all out FX rout, but the ongoing decline in Belgium holdings. As the chart below shows, Belgium, pardon Euroclear - which is a clearing house not only for China but many other EM nations who park their reserves in Belgium - sold another $45 billion in Treasurys last month, bringing the total to a dangerously low $111 billion, down from $355 billion at the start of the year.
Lumping Belgium and China holdings into one, as we have done since May, shows that as expected, Chinese selling continued in August, and the result was another drop of $43 billion in TSY holdings in the month of August, which incidentally mirrors perfectly the previously announced decline in September Chinese FX reserves, which according to official data declined from $3.557 trillion to $3.514 trillion.
According to the chart above, while to many Quantitative Tightening is a novel concept, the reality is that China (+ Euroclear) have been dumping Treasurys and liquidating reserves since January when total holdings peaked at $1.6 trillion last summer, and have since declined to $1.38 trillion. It means that China has sold a quarter trillion dollars worth of Treasurys in the past year, in the process offsetting what would have been about 25% of the Fed's QE3.
However, the real number is likely far greater.
While China's official (declining) FX reserve data (a real-time mirror of the TIC data from China's perspective) is a useful guide to what is happening with China's reserves (primarily US Treasurys, as well as European sovereigns and various other unclassified assets), it is also manipulated by the politburo which does not want to give an overly pessimistic picture of what is happening in China. As a result, a far more accurate representation of FX flows comes from the data showing FX purchases for the whole banking system (PBOC plus banks), as this number is far more difficult to rig.
As we previously reported, in September FX purchases decreased by US$120 billion in September (vs. a decrease of $115bn in August). This is a troublin discrepancy with both official Chinese reserve data and US TIC data as the scale of decline in this data is significantly larger than that in PBOC’s FX reserves (-$43bn) and its foreign assets (-$42bn), suggesting that banks have resorted to their own spot FX positions to help absorb outflow pressure.
More from Goldman:
Given possible PBOC balance sheet management (e.g., short-term transactions and agreements between with banks, e.g., forward transactions, FX entrusted loan drawdown or repayment), we interpret the FX reserves data with caution, as it might not give a complete picture of the FX flow situation. The large gap between today’s data and the other PBOC data for September suggests that banks might have used their own spot FX positions to help meet some of the outflow demand, although banks’ overall FX positions might still have been squared with the PBOC via forward agreements. This also partly explains why new RMB loans exceeded RMB deposit generation by a large margin (of over RMB 1tn) in September, as shown in yesterday’s money and credit data--apparently corporates and households converted a large amount of their RMB deposits into FX. Overall, today’s data indicates that the outflow situation might have improved only modestly from August. Note that today’s data do not include information on possible forward transactions between the PBOC and onshore or offshore banks.
The problem with China's data - and incrasingly the US - is that it is completely unreliable. So to get a full picture of what really hapepned, we will have to wait for SAFE data on banks’ FX settlements on behalf of their onshore clients (due on October 22nd) to have a more complete view on the FX-RMB conversion trend among onshore non-banks. That report captures banks' FX transactions vis-à-vis non-banks through both spot and forward transactions (for August this data showed an overall FX outflow of $178bn).
But even with the incomplete picture we have, we can draw two conclusions:
- Chinese FX outflows are actually accelerating, not slowing down, despite the PBOC's (and TIC's) best efforts to show that China has sold "only" $250 billion in Treasurys in the past year
- Chinese TSY selling has so far not impacted price of 10Ys adversely because it took place in a time of "great unrotation" from stocks into safety assets, and a surge in global deflation fears provoked by... China. Now that the Politburo appears to have fooled markets that China is "fine" once again, and inflationary fears reemerge, preserving the bid for 10Y paper may not be quite so easy especially as China continues to fight capital outflows by selling reserves.
- The recent data on rising Chinese credit creation had nothing to do with an improvement in the economy, and everything to do with covering the discrepancy between official (declining) capital outflows, and unofficial (increasing) capital outflows.
Bottom line: China's capital outflow is getting worse, not better, and continued to drag not only its economy lower, but accelerate China's disposition of Treasury paper. Anyone hoping for a quick rebound in China's economy will be severely disappointed.
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it means WAR!
a quarter trillion Ho Li Fuk !!
....and the PBoC was heard to loudly say "Wi Bai Bling !!!"
So what?
The Fed will simply be the buyer of first, last, and only resort:
https://research.stlouisfed.org/fred2/series/TREAST
They already hold more US Treasury debt than China and Japan combined (about $2.5 TRILLION)...
So the US is printing money into existence and buying IOU's (Treasuries) from China with printed money?
China is moving this money into what exactly?
If it is it's own currency, isn't the source of funds (US dollars printed into existence) just another way China can do QE indirectly?
China is probably turning the Tresuries into something more substantial like, gold, commodities, and property.
That's a reverse QE of the last 6 months of Fed QE
This happens to be a Qtr $guadrillion!
Try reading the Headline one more time. You might want to fact check your numbers. A qtr gazillion is a lot.
Stupid question....so who's buying it all?
Probably the Fed's proxies. They can always force the major American banks to use their excess reserves to buy those treasuries.
Kinda what I thought. But isn't that a LOT of reserves?
That's the beauty of electronic money
Beauty of electronic money you say? I'd call it the horror of electronic money. But I'm not a central banker.
https://research.stlouisfed.org/fred2/graph/?id=EXCSRESNW,
But, yeah, even if the Fed doesn't want to transfer China's holdings onto its balance sheet, it can whip up the digital FRNs and quietly pass them off to the primary dealers to bolster their balance sheets with more USTs. That is if the ~$2.6 trillion in excess reserves minus the cost of buying China's holdings is enough to take their cushion down far enough to make them nervous.
And FFS, what is the source of digital FRNs that keep on bumping excess reserves up to around $2.6 trillion every time they start to fall? I think I know the answer, but I thought I know for whom Belgium was a straw purchaser before China was outed, so I'd like some solid evidence.
There you have it bitchez.
http://investmentresearchdynamics.com/wp-content/uploads/2015/10/REPO1.png
It's enormous! $405 Billion vs. about $50 Billion in '08. Good thing the FED's holding all those Treasuries, they're gonna need 'em.
and they just uber bumped those reserves with their nuclear reverse repo, maybe its more direct, maybe they bought those treasuries through a proxy and now they're unloading them onto the banks excess reserves, either way...in a RR the fed parks assets onto banks reserves by offering them a deal on rates.
the fed and/or its shareholders (banks). Also known as the pimp and its hos. More financial hijinx.
People like this guy,.
http://www.wsj.com/articles/an-obscure-hedge-fund-is-buying-tens-of-bill...
about $2.5 TRILLION???
I think the fed is holding closer to 4 trillion that we know about. And if we know that much how much more do the hold that we dont know about. Just like the 16 trillion in loans they made to Europe after 2008 which no one knew about till later on
Hidden QE?
China dumping is the only way a new round of QE can look remotely the same as the old rounds. Without China dumping, the QEs of old would crush shadowbanking.
so Belgiums total Treasury holdings are about 1/3 lower than at any time in the last two years? so the aftermarket is becoming a bit less liquid? that kid who bought these things for the hedge fund is probably feeling pretty good right now. don't know what it means for new issuance, but if we hit the debt ceiling and investors want more treasury paper it could get interesting. good thing bernanke sterilized all the EM hot money, makes me sleep better at night to know that
China and USA are controlled by the same hands. All is under complete control.
Hi Brandon...!!!
There is noone in control.
peter noone?
Thinking this through at 0-level : Chna sells treasuries, pulling printed dollars out of the world's economy and using them to deal with China's internal problems. That has 2 effects at 0-level, it pushes down the price of treasures == raising the interest rates on those IOUs and allows China to use the proceeds to keep their currency high relative to the dollar and other currencies, which protects their export manufacturers.
At 1-level, the interest rate required for the US to sell new debt must be higher than the rate on the Chinese-sold equivalents.
At 2-level, that devastates the US budget. There is no way the US can deal with even a 5% interest rate, we can't handle the debt as it is. The debt turns over every 4 years or so, so the problem gets worse fast, budget crunches will be immediate.
At 3-level, our military insulates itself from budget cuts. That includes our NSA, controller of the US political system, and the CIA, controller of much of the world's political systems.
If you wish to change this, you must get rid of the political control of Americans. Like this :
https://thinkpatriot.wordpress.com/2015/10/16/information-resistance/
QT is to QE what currency wars via carry trades is to Brazilian real and Japanese yen.
What is now looming is the scenario of deflation's Collapsoapocalypse, under the weight of peak RM and down the drain of "over the peak" debt.
Let's see what transpires in this arena over the next month or three, after the huff & puff flotilla arrives at the Sand Castles.
So what? If China is selling our debt - then someone is buying it! The problem arises when they try to sell and NO one buys. Even then - China still owns it. I just don't get the hysteria around China selling our bonds.
US is buying its own debt
Over the last few years of Euro crisis I gather there was some repatriation of foreign debt instruments to the home country of the debt. Maybe part of plans to be able to manage the coming big reset(s) to contain cascades of damage from default.
a few years ago the Chinese threatened to unload their bonds, and the UST printed $1t in cash, just in case. we called their bluff and nothing happened. in this instance there is demand in the after market (belgium) because the problems in china have sparked a flight to safety. it looks as though demand far exceeds supply and that has resulted in negative yields at auction and could lead to NIRP. its not clear who might be a proxy or the proxy of the proxy but the entire system is based on the US buyings it own debt, which is monetization, or a giant bond kiting scheme. its likely we could end the fed and end the scheme and monetize directly, or take parts of the debt off balance sheet. that way we are only printing money to pay old debts, obama is completely corrupt on this matter, as he contends we must raise the debt ceiling to service existing debt, while ignoring the basis it gives for creating new debt. somebody needs to stop the madness.
I'm sure Boehner and the boys can push that ceiling another $2 Trillion. Free government motors' Caddy's for the FSA!/sarc
Supply and demand. Flood the market without manipulation and the price goes down, thus yields go up. The more USTs on the market, the more manipulation is required to keep yields suppressed, else the US cannot afford to service its debt.
there is none youre right
of course hidden QE.... but much worse... it is not going in the markets... only to buy what the chinese are selling... Goldman will be jealous and demand even MOAR QE
if i was a financial manager(i am not..just got good common sense),i would advise this to my customer(to sell it ALL) in light of recent movements,back room chit-chat,hints,allegations,and things left unsaid..you know,the writing on wall...duh.
So Belgium also has a hard landing?
For every billion dollar seller there has been a buyer in the treasury market. If not, then interest rates would have spiked by now. PLEASE pay attention to the treasury bond charts NOT the theories published by the various faces of "Tyler Durden" of Zero Hedge.
Yes, and so who are all these 'indirects' (i.e., foreign central banks) that are doing the 'buying' as you suggest...? The 'BLICS' perhaps...?
Are they borrowing at close to zero interest rate and posting the bought bonds as 100% collateral? Is there any limit at all to this?
The price inflationary effect gets felt depending on what China does with the proceeds of the sale, does the money go back into another icebox or does it have some velocity?
Who would you guess? The Fed, or the Treasury funded by the Fed, or another CB also funded by the Fed?
Exactly. Don't see it mentioned anywhere in that rambling article that 10 year rates haven't moved. You'd think that would be "the most important data point"
The article also neglected to mention that Foreign Central Bank ownership of USTs happens to be at a 12-month high (at $4.173 Trillion). The Chinese were selling, but others were buying, and you can see the breakdown by country here: http://www.treasury.gov/ticdata/Publish/mfh.txt
Oh, and of all those foreign holdings, less than 4% have maturities of 10 years or more...
Consider China's approach if Obama and the US Navy do something immeasurably stupid in the South China Sea.
Who would buy China's shit? All more smoke and mirror distractions. China has more to lose than the US with civil unrest. Not going to be a China US war.
Who would buy China's shit? All more smoke and mirror distractions. China has more to lose than the US with civil unrest. Not going to be a China US war.
Not hard to imagine.
So Belgium has finally found a role on the international stage outside of being an invasion route for the Krauts and cannon fodder for the French and English. Good for them.
How is it QT when interest rates haven't gone up at all?
How is it QT when interest rates haven't gone up at all?
Some more "medicine" only this time Russian flavored!
Oh... And it WILL HAPPEN and will be spectaculor when it does!!!!
"Putin is back in the Kremlin after his meeting with Obama in New York. He tells an aide he invited Obama for a game of chess. And then he tells it how it works: “It’s like playing with a pigeon. First it knocks over all the pieces, then it shits on the board and finally struts around like it won.”
Have no fear, the Federal Reserve will just print trillions to buy these treasuries up and bury them under off-balance-sheet.
The debt will just disappear.
Mark to fantasy, just like their member banks.
And you thought that building a Potemkin village was cheap? Well guess again!! Not only do you have to subsidize a $trillion here and a $trillion there of crappy exports, but also the elites behind them with the mega-SOEs. And that is not counting the housekeeping bill for the fungus factories, err ghost cities and abandoned theme parks, airports, rail lines, etc. Gotta keep that all important monthly shuttle-of-money through the sieve going somehow!!
If China GDP good, fear interest hike. If China GDP bad, fear weak global growth. Either way, market tanks next week.
The Fed is unaudited, so they can get away with buying as many bonds and now stocks are they want. Anything to keep the .1%er's paper assets from deflating and them and ending up in a depression like main street.
Why have interest rates not moved even slightly with all this 'liquidation' going on? Or am I just naive?
Chinese selling of USTs has had little effect on the 10Y because the vast majority of foreign central bank holdings are shorter-term paper. Looking at total foreign ownership, less than 4% of it is in maturities of 10 years or more.
I bought a lot of treasuries, not enough to affect the stats of course. They are paying me 3% interest and as the global economy stumbles down, and crises flare around the world, I will also get capital gains. Treasuries are a very good investment right now.
Stinky withered old people...No Social Security COLA for you! US is buying its own debt and forcing Fed proxies to kick in. TBTF? Noooooo.
"But even with the incomplete picture we have, we can draw two conclusions:"
Nobody expects the Spanish Inquisition.