For all of China’s tough talk on the US dollar, and the generally bearish outlook on that currency, China is continuing to accumulate US Treasuries, economists deduce based on the latest published data on Treasury purchases.
According to US Treasury International Capital System (TICS) data, China was a net seller of US Treasuries in August to the tune of $3.4 billion; it bought long-term US Treasuries for $15.4 billion, and sold securities worth $18.8 billion.
But Standard Chartered economists Stephen Green and Jinny Yan conclude, citing previous trends that show China also purchases US securities through London, which “China likely continues to be a net buyer of US securities each month.”
“Some of China’s purchases (of US securities) do not show up in the TICS data under China’s name, but are instead classified as purchases by the UK,” point out Green and Yan. “This ‘error’ in the monthly data is made clear in the annual survey, where a large portion of the UK’s purchases over the previous year are reallocated to China.”
On this basis, Green and Yan estimate that China’s total holdings of US securities were $1.44 trillion at the end of August, or about $34 billion more than suggested by monthly TICS data.
Monthly changes in China’s US Treasury holdings have come in for close scrutiny in recent months in order to gauge the government’s attitude towards dollar assets, but so far, there hasn’t been any indication that China is matching its rhetoric with any move away from US securities.
That’s because China has few practical alternatives to US Treasuries in the short term, reasons JP Morgan chairman of China equities Jing Ulrich. “China remains the largest foreign holder of US Treasury securities: its share of total outstanding short- and long-term Treasuries has been relatively stable this year at 23-24%.”
“Despite concerns about the weakening dollar and earlier statements about diversifying the country’s foreign reserves, China’s status as the largest foreign holder of US treasury debt limits the scope for any major shift in the near-term,” points out Ulrich.
Since this February, China’s total holdings appear to have vacillated from month to month. Although the overall trend has been one of growth, notes Ulrich.” The decline in August constituted the smallest monthly change since November 2007.”
In fact, during the July-September quarter of 2009, China’s reserves increased by $141 billion, compared to a gain of $177.9 billion in the second quarter. “The third quarter rise in foreign reserves substantially exceeded the quarterly trade surplus of $39.2 billion, which would suggest an influx of offshore money during the period,” says Ulrich.
Significantly, China’s purchase of US securities continues to show a bias towards longer-dated Treasuries for the third straight month. “China’s net purchases of notes and bonds exceeded purchases of bills in August, possibly a reflection of the wide yield differential between long- and short-term securities,” reasons Ulrich. The average yield differential between the 10-year Treasuries and 3-month bills was 3.42% in August, compared to 3.38% in July.
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