Has China Been Quietly Selling US Treasurys: Here Is The Answer

Following today's blockbuster, if still unconfirmed, report from Bloomberg that China is contemplating slowing or halting outright the purchase of US Treasurys in retaliation for an escalating trade confrontation with the US, which in turn led to a modest, if brief, selloff across the curve, some have asked if this is merely posturing or if China is actually ready to pull the plug.

This question breaks down into three distinct parts.

The first is whether China is ready to not only violate global capital markets, in the process certainly hurting itself as the largest offshore holder of US debt, but has the determination to proceed with this plan once it begins, even after the "BTFD" algos emerge. This was at the core of Steven Englander's argument presented earlier today:

Can [China] afford for asset markets to blow this off completely and yet again 'buy the dip'? For any threat to be credible, the impact probably has to last more than six hours. If there is a wave of market-close buying of assets, any future retaliation would have to be even stronger, and this would carry risks both to China and other countries.

Then, there is another, even more important question: is China ready to replace the US as the global bogeyman, i.e., the catalyst for what could be a global recession if the Chinese "retaliation" goes too far, to wit:

How will [China] react to the rest of the world saying  "Thank you for appreciating my currency, raising my bond yields, and putting downward pressure on equity prices?"  China's move, if pursued or if it unleashes other concerns, could raise questions about the longevity of a bull market that was finally putting to bed the legacy of the GFC, the EZ debt crises and the EM sell-offs of recent years. If their bilateral trade dispute with the US leads to a global asset market sell-off, their case for establishing themselves as an alternative global financial lynchpin weakens. Most likely they take very limited actions, even pull back some of the comments, but imply this is a warning that they can retaliate if the US is too aggressive or irresponsible.

Then there is the most important question of all: is China even capable of hurting Treasury pricing for an extended period of time: as today's 10Y Treasury sale showed, there was a surge in demand following the selloff in US paper over the past 48 hours, implying that should China be willing to liquidate its $1.2 trillion in TSYs, someone may be more than happy to buy these at a same, or better yet, lower price. This is the argument made by Bloomberg's macro commentator Ye Xie earlier today.

China added $131b in Treasury holdings in the first 10 months of last year, or $13b a month. How much U.S. government securities traded among primary dealers in every single day last year? More than $500b. While China’s actual purchases may be bigger than the official data because it may have covered its trail in accounts in places such as Belgium, the truth remains that the ocean is just too big for one whale to make a splash, even as large as China is.

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If anything, one could make an argument that a reduction in China’s holdings could, at times, drive down yields, instead of pushing them up, as shown in this chart. When the PBOC sold Treasuries in its foreign reserves in early 2016 to offset capital outflows, it may have helped spur demand for safe havens from investors who were concerned about a China crash. As China’s economy started to recover in the second half of 2016, it resumed the purchases and the yields went up slightly.

Xie made another point: in light of China's plunging current account surplus (which according to some calculations has now become a deficit), "the big picture is that the heyday of China’s reserve accumulation -- its appetite for Treasuries -- is long gone."

In other words, China may be halting Treasury purchases not because it is making some profound political statement, but simply because it no longer has the need, or purchasing power, to buy them.

Ok fine, but what about the opposite: will China be selling Treasurys?

The answer to that will have to wait as it depends as much on China's own strategy, complex as it may be, as what Trump may say or tweet at any given moment. Therefore making any predictions on this topic is just as irrational.

What we do know with near certainty, however, is whether China, or other foreign official entities, have been dumping Treasurys in recent months. For that, we go not to the hopelessly inaccurate and delayed Treasury International Capital report, which is far better known for its annual revisions than its accurate "data-keeping", but to the Fed's weekly H.4.1 statement, and specifically the line item for "Securities Held in Custody for Foreign Official and International Accounts: Marketable U.S. Treasury Securities."

As regular readers know, this is the most comprehensive, and most concurrent, data set available demonstrating what, if anything, foreigners are doing with their US Treasurys, the vast bulk of which are kept not offshore, but actually at the NY Fed as "custody" securities.

What this data shows is that after hitting an all time high of just over $3.05 trillion in the second week of December, foreign-held Treasurys are virtually unchanged, or just a modest $30 billion lower in the last two weeks, to $3.02 trillion. Compare this number to the sub $2.8 trillion hit in late 2016 when the combined selling by China and "Belgium" took US Treasury holdings in custody to the lowest level since mid-2012.

 

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In other words, when the Chinese Treasury selloff begins, we will know. For now - and contrary to what Bill Gross said earlier - it certainly has not.

Comments

REAL MONEY peopledontwanttruth Wed, 01/10/2018 - 17:34 Permalink

http://www.usdebtclock.org/world-debt-clock.html

 

This is no bluff.  We have 98% external debt to GDP ratio.  China;s total debt is a little over $2 trillion and they have over $3 trillion in surpluses.  We have $110 trillion in unfunded liabilities.  They are planning to dump the dollars and it will have a significant effect on our way of life.  They dump and you have a domino effect with others holding U.S. debt..  Anybody who thinks this will significantly hurt them as much as us is living under a rock.  They have derivatives in place to offset these losses.  Plus at anytime they and Russia can reset the price of gold to whatever they want.  They would just say we will buy all available gold at lets say $5000 and the eastern horde of gold owned by  China, Russia, India, and most of the asian countries will reap a giant benefit, while we languish as a third world country.  They have been buying for years and available stock has been sold or leased.  This has been planned out and China knows it won't be paid for their U.S. treasuries.  They have been building out the silk road for years and Monday they role out the petro yuan.  Is this a coincidence?  Don't think so!!!!

In reply to by peopledontwanttruth

MK ULTRA Alpha REAL MONEY Wed, 01/10/2018 - 18:43 Permalink

"China;s total debt is a little over $2 trillion and they have over $3 trillion in surpluses. " This is inaccurate, Chinese debt is huge. That's what all the fuss was about, the ability of China to service it's debt.

An anti-American will twist reality because they're already living in a souped up television head kind of mind. CHINESE DEBT IS NOT $2 TRILLION. People please read more, then you will be able to decide fact from fiction.

Of the $20 trillion US debt, only around $6 trillion is owned by foreigners, a portion is owned by social security, the greatest holder of US government debt. And China only owns $1.2 trillion  US debt and next would be Japan, so US debt holders are DIVERSIFIED.

These doom and gloom fear porn operators ignore the size of US capital markets, and trillions upon trillions of hot money flowing in and out of NYC daily, the US Fed Open Market Operations can soak up China's US debt holding over night.

In reply to by REAL MONEY

philipat MK ULTRA Alpha Wed, 01/10/2018 - 20:00 Permalink

"Only around $6 Trillion is owned by foreigners". You know, a Trillion here, a Trillion there and pretty soon we'll be talking real money?

Since you are keen on facts, it is also a fact that Chin's debt is ALL domestic and could be written off with a few Accounting entries at PBOC.

Empires come and go and not to acknowledge the precariousness of the US Empire's financial position is ignorant. Unless, of course, it's all different this time?

In reply to by MK ULTRA Alpha

MK ULTRA Alpha philipat Wed, 01/10/2018 - 20:32 Permalink

"Chin's debt is ALL domestic and could be written off with a few Accounting entries at PBOC. " Who told you this, China has a significant amount of foreign debt and that debt must be serviced in a hard currency. China must buy hard currency or earn hard currency to continue to pay down a mountain of foreign debt.

This BS that China is going to take out the US is a long way away from reality.

Evidently someone isn't keeping up with China. There was a big fear warning recently because the Chinese economy slowed, the result of the slow down would be a China unable to service it's foreign debt. China governmentsa, provinces, cities and private sector companies all have a substantial exposure to debt and a portion is foreign debt. But because Chinese economic statistics reporting is poor to non-existent the true amount of total Chinese debt is between $30 trillion to $40 trillion.  These amounts were cited repeatedly when the Chinese economy slowed.

In reply to by philipat

Pool Shark buzzsaw99 Wed, 01/10/2018 - 17:29 Permalink

I think the confusion arises because people fail to see the USD (and all paper & electronic investments) for what they are: IOU's.

Each one is a claim on someone else's labor or goods.

The world is awash in these IOU's and there aren't sufficient resources to redeem them all.

The problem arises from all the DEBT that's been accumulated by governments and individuals. DEBT and paper investments are matter/antimatter: One person's 'wealth' is a paper claim on another person's labor/goods.

If the debt is destroyed, so is the wealth: POOOF!

That's why "Debt Forgiveness" can never happen and why we get Deflation during economic crises: when a person's income stream slows or stops, he begins a "Hunt for Liquidity" by selling assets to pay obligations; hence, asset prices crash.

As long as the USD is the world's reserve currency, we can never have a hyperinflation. Hyperinflation is NOT a monetary event, it is a political event.

In reply to by buzzsaw99

buzzsaw99 Wed, 01/10/2018 - 17:21 Permalink

saying that china will dump treasurys with the intent of crashing the market is the same as saying they want to get fucked in the ass by strangers on the price.  reminds me of that scene from blazing saddles, the first man makes a move, the chigger gets it!

Yen Cross Wed, 01/10/2018 - 17:24 Permalink

   I've listened to people incessantly beat their gums about how China is so awesome.

  China has a debt GDP almost double the U.S. , $31T in stated debt= 1.5x the  $21T ponzi in the U.S., and it's a communist corrupt shit-hole, built on NPL and sandcastles.

   Yes, it's refreshing to see another bully on the block, but China is a cluster fuck looking for a place to happen.

   Rising treasury yields from China selling is the worst thing that could happen to the Yuan.

 

  

 

 

 

 

Dolus Yen Cross Wed, 01/10/2018 - 18:01 Permalink

Exactly this.

"Rising treasury yields from China selling is the worst thing that could happen to the Yuan."

If any of you remember Hypertiger (I dare say brilliant but crazy) wrote a lot about just this. 

http://hypertiger.blogspot.com/2009/

"China?

They threw over 50 million people out of work when the US consumer caved in.

Their economy is based on export to the rest of the world...The USA makes up over 25% of the rest of the world and the other economies either have the USA as the largest consumer of their exports or the largest consumer of their exports has the USA as the largest consumer of their imports so without the consumers of the USA...they along with the rest of the world are toast...their economy implodes without massive imports of inflation from the rest of the world with the USA the engine of global inflation grinding to a halt.""

 

 

 

In reply to by Yen Cross

Consuelo Wed, 01/10/2018 - 18:00 Permalink

 

 

"...but simply because it no longer has the need, or purchasing power, to buy them."

 

A-ha-ha...   He said - 'purchasing power'...

Youri Carma Wed, 01/10/2018 - 18:14 Permalink

Just Beta testing I think. China now knows that it always can sell it's US treasuries at a high price. Sell a little wait, sell a little wait, etc ...

wholy1 Wed, 01/10/2018 - 20:18 Permalink

In the end, any greedy idiot holding US [paper birds in the out-of-hand-bush] "Treasure"ys deserve to desperately run around chasing said.  Welcome to "The Road", you sorry fucks!

Conscious Reviver Wed, 01/10/2018 - 21:24 Permalink

China would be happy to keep selling into a rising price. No doubt they gamed this already. Gamed as in examined various possible out comes. If the game is to get out of the dollar, a rising price in doing so is a bonus. 

ds Wed, 01/10/2018 - 21:34 Permalink

China needs global market stability to get out its hole over its desired long soft landing (Japan syndrome). Selling the $ will destabilize the money flows internally and they do not have a deep capital market to absorb shocks.

Cheer them on to dump US$ Try and you find plenty of proxies to benefit from a crashing economy.