When the latest Treasury International Capital data was released yesterday, many were quick to conclude that not only had China's selling of US Treasury ceased, but that with the addition of $7 billion in US government paper, China's latest total holdings of $1270.3 billion were the highest since May of 2014. And if one was merely looking at the "China" line item in the major foreign holders table, that would be correct.
However, as we have shown before, when looking at China's Treasury holdings, one also has to add the "Belgian" Treasuries, which is where China had been anonymously engaging in a record buying spree via the local Euroclear, starting in late 2013, which however concluded with a bang in early 2015.
This is what we said last month:
- "Belgium" is, or rather, was a front for China: either SAFE, CIC, or the PBOC itself.
- That Belgium's holdings, after soaring as high as $381 billion a year ago, have since tumbled as China has dumped the bulk of its Euroclear custody holdings, and that once this number is back to its historical level of around $170-$180 billion, "Belgium" will again be just Belgium.
- China's foreign reserves plunged concurrently and this was offset by a the biggest quarterly drop in Chinese pro-forma treasury holdings, which dropped by a record $72 billion in the month of March, and a record $113 billion for the quarter.
It wasn't precisely clear just why China, which had historically used UK-based offshore banks to transact in US paper in addition to the mainland, would pick Belgium (and Euroclear) or why it chose to hide its transactions in such a crude way, however the recent acceleration in capital outflow from China manifesting in a plunge in Chinese forex reserves, coupled with a record monthly liquidation in total Chinese holdings, exposed just where China was trading.
So with the benefit of the TIC data, we know that China's Treasury liquidation has not only not stopped, but has continued. Enter, once again, Belgium, only this time it is not a "mystery" buyer behind the small central European country's holdings, but a seller.
As the chart below shows, after a record $92.5 billion drop in March, "Belgium" sold another $24 billion in April, and another $26 billion last month, bringing the total liquidation to a whopping $142.5 billion for the months of March, April and May.
This means that after adding mainland China's token increase of $7 billion in May after a $40 billion increase the two months prior, net of Belgium's liquidation, China has sold a record $96 billion in Treasurys in the last three months.
Just to confirm that one should add the dramatic changes in "Belgium" holdings to mainland China Treasury, here is a chart overlaying China's Forex reserves, which as we learned today had dramatically increased by 600 tons of gold, but more importantly forex reserves declined to $3.693 trillion, a drop of $17 billion from $3.711 trillion the month before, and the lowest since September 2013!
Putting all of this together, it reveals that China has already dumped a record total $107 billion in US Treasurys in 2015 to offset what is now quite clear capital flight from the mainland, and the most aggressive attempt to keep the Renminbi stable.