Breathing fire, then buying dollar assets

For all of China’s tough talk about diversifying away from a weak US dollar and into gold or silver, the country’s appetite for US Treasury holdings remains undiminished, evidently because it sees no safe alternative.

 “According to the latest US Treasury International Capital System data, China’s US Treasury holdings increased by $24 billion to $800.5 billion in July,” Standard Chartered economist Jinny Yan told DNA Money on Friday. “Like the rest of the world, China is still seeking a safe haven in US treasuries.”

Speculation about Chinese diversification into gold or silver as an alternative to the US dollar “is just media talk, we don’t see strong evidence of that yet,” adds Yan. “In the long run, there may be an intention to diversify, but at the moment, from the sheer size of China’s treasury holdings, we can’t see an immediate alternative.”

China’s strategy, she adds, “hasn’t changed, and China continues to buy US treasuries simply because it’s still seen as a safe haven, with no better alternatives for the time being.”

Nobel Prize-winning economist Robert Mundell told a conference in Guangzhou in southern China on Thursday that the increase in China’s US treasury holdings reflected its confidence in the US economy and the dollar.

“This also confirms that the US economy is coming out of recession and the dollar devaluation will end. I think it is a good opportunity now to buy US government bonds.”
Mundell, celebrated as the “father of the euro”, reckons that the dollar’s dominant status will continue — in the absence of strong alternative monetary systems.

Neither the euro nor the yen could replace the dollar as the reserve currency of choice, and as for the Chinese renminbi, it is not freely convertible and its transition to international currency status will be “long and uncertain”.

StanChart’s Yan reckons, based on data analyses, that China is making unreported purchases of US treasuries through London and other financial centres. “We have consistently held the view that the official data underestimates China’s US treasury holdings. We believe that a portion of China’s purchases of longer-term US treasuries through intermediaries do not show up in the TICS data as purchases by China, but are instead classified as UK purchases.”

It’s hard to estimate exactly how much of the purchases are made out of London, she says, but analysis of monthly data as well as the annual surveys leads her to arrive at that conclusion. “Each annual survey revises London purchases down by pretty much a mirror image of how much it revises China data up by,” says Yan.