China's US Treasuries Holdings Dipped?

Beijing’s long-feared dumping of US Treasuries, or the use and value of the PBoC’s central bank reserves was ignited again. The revelation that Chinese holdings of US Treasury obligations fell in December by $34.2 billion, to $755.4 billion, brought new fears. But are they justified?

In December 2009, China slipped below Japan to become the second largest recorded holder of U.S. treasuries, as it continued to unwind holdings of U.S. Treasury bills and Japan bought over US$11 billion in treasuries. China's recorded stock of U.S. treasuries has fallen from US$800 billion in July 2009 to US$755 billion at the end of 2009. China has been shifting back to purchases of longer-dated treasuries after buying more T-bills in late 2008 and early 2009. China's holdings of Treasury bills has fallen from a peak of US$210 billion in May 2009 to US$70 billion at the end of 2009. This shift implies that China may be purchasing some U.S. assets through intermediaries. China's net purchases of long-term Treasury bonds were US$4.6 billion in November.

In mid-2008, China surpassed Japan to become the largest single holder of U.S. Treasury securities. After a sharp increase in its T-bill purchases in late 2008, China gradually reduced its U.S. short-term debt holdings and shifted into long-term Treasuries in 2009.

China dropped its overall holdings , yes, but the article fails to mention the shift in holdings by other key countries that offset completely China's sell-off. In December, the UK and Japan jointly increased their holdings by more than China dropped its holdings, + $US 36.4 bn vs. -$US 34.2 bn. China's current portfolio is really not that difference from recent history. China's December share of US Treasury holdings, 20.9% (as a % of total foreign holdings), is barely off its 2007-2009 average, 21.4%. But Japan's holdings are way off, and could revert towards the average, 23.7%.

p/s photos: Padma Priya

China Should Lend More To Emerging Asian Nations

Things do get lost in translation. When I read what Luo Ping said about the USA and its currency. Luo Ping is the director-general at the China Banking Regulatory Commission. I am not laughing at his English, but its really quite funny. Luo must have gotten good laughter as he mentioned the following in his speech in New York yesterday:

"Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. for everyone including China, it is the only option."

Eeerrr, Mr. Luo must have gotten a bit exuberant. There are plenty of things you can hold besides US Treasuries. Yes, I agree that you will need to hold a substantial sum of Treasuries in order for the global economy not to collapse overnight, but a better way would be to reveal a long term plan to bring down US Treasuries from say 80% of your portfolio to 70% by end 2011 and to 60% by 2015. This way everybody knows there is a strategy in place. Its not impactful immediately because its out there in the horizon, but at least the US would know for sure they really, really have to get their house in order or face a huge currency depreciation. Right now, everybody thinks the US dollar will depreciate, even Obama and Geithner, but it will probably not happen in a drastic fashion as in their minds they still think the world needs US more than the US needs the rest of the world. Thus most top dogs in US government do think that, while it may not be financially prudent or wise, the rest of the world will continue to lend to the US in the forseeable future even though they may be screaming and kicking.

Not being able to hold Japanese govenment bonds? Where Mr. Luo got that from, of course you can, just not so much. Let me give China a great idea:
LEND TO EMERGING ASIAN COUNTRIES IN THEIR OWN CURRENCIES
Since China loses so much money in Treasuries on currency movements, plus that move tends to encourage bad behaviour by US consumers... they just consume and consume and no savings. Why not encourage emerging countries in Asia instead, I am sure they will give you a better bang for your buck.

You can lend the equivalent of $20bn each to Malaysia, Indonesia, Thailand, Vietnam ... and US$10bn to Cambodia, Laos, Bangladesh... by holding bonds in their local currencies. Hence these countries will pay back to China in local currencies as well. These bonds will be for a 6 year period, with interest payments being zero for the first year, and then benchmarked to the prevailing local BLR for the rest of the 5 years.

Why should China be so generous? One, it adds to proper investing in a broader consumer base. Two, it add more economic might to Asia as a region by having more robust FDI and consumer base. Three, it will help cement stronger ties with China with the rest of Asia. Four, this is exactly the role that China should be stepping into to assume the future economic leadership and influence. Five, it allows for a kind of currency swap arrangement with smaller countries, which will allow for better depth and protection to emerging markets' currencies.

Seriously, China will not and should not look for the money to be repaid but rather "refinanced" at the end of 6 years PROVIDED these countries have shown that they have invested most of the funds properly. Yes, the countries may have to "kowtow" a bit to China, but hey, thats the money politics and business pragmatism that we all know so well. The idea may sound well on paper but these smaller nations will need to convince themselves that this is the right thing to do as well, instead of letting natinalistic fervour and narrow-mindedness destroy this idea.

Back to Mr. Luo's speech in New York:

"We hate you guys. Once you start issuing $1 trillion-$2 trillion... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

You gotta love the guy. From the text of his speech, obviously he meant nothing venomous by his use of the word "hate", it was probably well used to lighten up the situation and probably elicited much laughter.

p/s photos: Amy Fan Yip Mun