With the December Treasury International Capital System data released Tuesday, pundits and analysts have been abuzz about China’s sudden drop ($34 bil) in declared Treasury holdings. Why do people care? Because dumping Treasuries would signal that China might not be willing to fund US debt anymore, which would cause US interest rates to rise and, generally, result in some nasty economic outcomes. So, how do we know if this drop has any broader significance?
It’s very hard to speculate on what this single data point means in the larger picture. But, I’ve been getting enough emails on the topic over the past two days that I thought I should address it. So, I canvassed a few of my peers who are far more knowledgeable and simply better placed to comment on what’s happening than I am. Here are some of their (abridged/paraphrased) replies:
- Despite what some are saying, this is not politically motivated. Nor is this about liquidity. This is simply a portfolio trade. What we are seeing is a sale to fund some other Chinese government activity, probably within SAFE or CIC.
- This could be all sorts of things. It could be a random reserve outflow, as reserve growth was faster than trade surplus last year. It could also be an attempt to discourage FDI. Or it could simply represent a portfolio re-balancing.
- This development is only meaningful in the sense that it shows that China is probably buying Treasuries increasingly through other, more opaque, vehicles. China really can’t avoid Treasuries, it’s the only instrument that has a big enough and liquid enough market to absorb China’s investment needs. [Note: This is actually the same point that Arthur Kroeber made this morning: “We do not believe that the Chinese are dumping Treasurys…What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing."]
So, that’s the word on the street; Americans apparently shouldn’t worry too much about this sudden drop in Treasury holdings. In fact, one article I read this morning suggested that the TIC data was a sign that China was bullish on the US economy:
“…a closer look at China’s holdings of US securities reveals that it may instead be betting on a US economic recovery. While China has been selling shorter-term US treasury bills that investors use as a safe haven in times of economic turmoil, it has been buying longer-term US treasury bonds and at the same time accumulating US stocks, raising its overall holdings of long-term American securities.”
If I had to throw my hat in here, I’d guess that some of the reserve sales are going to be funnelled directly into the CIC. We learned last month that the government was planning a large (~$250 billion) capital injection into its SWF. So, I’d agree with my peers above and call this part of China’s portfolio diversification.
That said, China is pretty tight-lipped about the details of its reserves. So it’s very hard to say…
China is investing throughout the world. Does that mean they are going to lend a lot less to the U.S.?
A ‘The Economist’ article titled ‘China’s “going out” strategy’ (Jul 21st 2009) talks about the Chinese premier’s comments on the subject:
“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday…”
Good question, Rene. I’d venture a guess to that we will indeed see less “lending” and more “investing” in the future. After all, isn’t that the basis for the CIC’s existence?
I get the impression that “lending” and “investing” are going to be used even more like weapons in the future than they already have been.
Given what has happened in the global economy, has anyone considered how to defend against a government causing a financial crisis on purpose?