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China cut its holdings of Treasury notes and bonds by the most ever in June, instead favoring the debt of Europe, Japan and Korea. The move has fueled speculation that plummeting U.S. yields are driving away the Asian giant, which has ambitions for its currency, the yuan, to replace the dollar as the world's main reserve currency.
China's holdings of long-term Treasuries fell by $21.2 billion in June to $839.7 billion, a U.S. government report showed recently. Total Chinese investment in U.S. debt declined 2.8% to $843.7 billion, the smallest in a year, following a 3.6% slide in May.
The shift comes as President Barack Obama increases U.S. debt to record levels, making it harder to finance sales to sustain the U.S. economic expansion.
China's holdings of long-term Treasuries fell by $21.2 billion in June to $839.7 billion, a U.S. government report showed recently. Total Chinese investment in U.S. debt declined 2.8% to $843.7 billion, the smallest in a year, following a 3.6% slide in May.
The shift comes as President Barack Obama increases U.S. debt to record levels, making it harder to finance sales to sustain the U.S. economic expansion.
The People's Bank of China on June 19 ended its currency's two-year peg to the dollar, saying it would allow greater "flexibility" in the exchange rate. The yuan has since appreciated by 0.5%.
Prior to letting it float, the central bank had been limiting the yuan's appreciation by selling the currency and buying dollars, a policy that led to the accumulation of the world's largest foreign-exchange reserves and the build-up of its Treasury holdings.
But the Treasury sales and the rapidly appreciating yuan may be signaling China has bigger things in mind for its currency.
The People's Bank of China said on Monday that it would allow foreign central banks and overseas lenders to increase investment in its domestic interbank bond market.
Analysts interpreted the move as a way of promoting the renminbi, while reducing China's exposure to the U.S. dollar.
"This is an integral part of pushing the internationalization of the renminbi," Wang Tao, chief China economist at UBS AG (NYSE: UBS) told the Financial Times. "In order to encourage foreign institutions to get involved in renminbi settlement, you need to give them somewhere to invest."
Money Map Press Chief Investment Strategist Keith Fitz-Gerald believes the Chinese have a long-term plan to replace the dollar as the international reserve currency.
"The Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle," Fitz-Gerald wrote in a column last year for Money Morning. "At the very least, China's currency is likely to be granted a global status on par with the current major currency trading pairs for purposes of settling international transactions, whether the West wants that to happen or not."
China also is turning more bullish on European and Asian economies.
China said earlier this week it had been buying "quite a lot" of European bonds, and Japan's Ministry of Finance said on Aug. 9 that China bought $20.3 billion more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.
Additionally, China has more than doubled South Korean debt holdings this year.
China [will] allocate some reserves to "financial assets in major Asian economies," Ding Zhijie, a former adviser to China's sovereign wealth fund, told Bloomberg in an Aug. 16 interview.
"The significance of both the dollar and euro has declined because of the global financial crisis and the European debt crisis, while the role of some emerging-market currencies rose," said Ding, dean of finance at Beijing's University of International Business and Economics.
While China may have long-term ambitions for its currency, some analysts think the Treasury sales are a simple reaction to shorter term developments - cashing in on an investment that has appreciated significantly since the U.S. began buying its own debt to keep interest rates low.
"This may have been opportunistic," James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley (NYSE: MS), one of 18 primary dealers that trade with the Federal Reserve, told Bloomberg News. "Look at the level of yields. If you've held a lot of Treasuries, you've done well."
Also, with rates at record lows, buying more treasuries now could be a losing proposition for China. Two-year rates will climb to 0.85% by year-end, according to a Bloomberg survey of financial companies. The two-year note yielded a record low 0.48% earlier this week.
Investors who purchased the securities today would lose 0.4% if that projection proves correct.
"Buying now is a big risk," Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan's third-largest publicly traded bank told Bloomberg. "I don't recommend it."
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Prior to letting it float, the central bank had been limiting the yuan's appreciation by selling the currency and buying dollars, a policy that led to the accumulation of the world's largest foreign-exchange reserves and the build-up of its Treasury holdings.
But the Treasury sales and the rapidly appreciating yuan may be signaling China has bigger things in mind for its currency.
The People's Bank of China said on Monday that it would allow foreign central banks and overseas lenders to increase investment in its domestic interbank bond market.
Analysts interpreted the move as a way of promoting the renminbi, while reducing China's exposure to the U.S. dollar.
"This is an integral part of pushing the internationalization of the renminbi," Wang Tao, chief China economist at UBS AG (NYSE: UBS) told the Financial Times. "In order to encourage foreign institutions to get involved in renminbi settlement, you need to give them somewhere to invest."
Money Map Press Chief Investment Strategist Keith Fitz-Gerald believes the Chinese have a long-term plan to replace the dollar as the international reserve currency.
"The Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle," Fitz-Gerald wrote in a column last year for Money Morning. "At the very least, China's currency is likely to be granted a global status on par with the current major currency trading pairs for purposes of settling international transactions, whether the West wants that to happen or not."
China also is turning more bullish on European and Asian economies.
China said earlier this week it had been buying "quite a lot" of European bonds, and Japan's Ministry of Finance said on Aug. 9 that China bought $20.3 billion more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.
Additionally, China has more than doubled South Korean debt holdings this year.
China [will] allocate some reserves to "financial assets in major Asian economies," Ding Zhijie, a former adviser to China's sovereign wealth fund, told Bloomberg in an Aug. 16 interview.
"The significance of both the dollar and euro has declined because of the global financial crisis and the European debt crisis, while the role of some emerging-market currencies rose," said Ding, dean of finance at Beijing's University of International Business and Economics.
While China may have long-term ambitions for its currency, some analysts think the Treasury sales are a simple reaction to shorter term developments - cashing in on an investment that has appreciated significantly since the U.S. began buying its own debt to keep interest rates low.
"This may have been opportunistic," James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley (NYSE: MS), one of 18 primary dealers that trade with the Federal Reserve, told Bloomberg News. "Look at the level of yields. If you've held a lot of Treasuries, you've done well."
Also, with rates at record lows, buying more treasuries now could be a losing proposition for China. Two-year rates will climb to 0.85% by year-end, according to a Bloomberg survey of financial companies. The two-year note yielded a record low 0.48% earlier this week.
Investors who purchased the securities today would lose 0.4% if that projection proves correct.
"Buying now is a big risk," Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan's third-largest publicly traded bank told Bloomberg. "I don't recommend it."
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Tags: China, Dollar, People's Bank of China, South Korea, Treasury Yields, U.S. Dollar, Weak Dollar, Yuan
Although my timing was off by 3 or 4 months, I predicted that China would do exactly this. I further predict that when they have reduced their USD reserve to below $400 billion, they will cease buying USD's completely. The United States will cease to be the economic power house that it has been in the past, and it is largely because of its foreign and military policies which have drained it of its financial resources. The only thing that can save the U.S. economy now is either a new U.S. based technology coming to the forefront, something that the entire world can use, or, the U.S. treasury will have to start dumping its gold reserves in order to reduce the debt.
US gold reserves are insignificant, compared to debt – the US will never sell its gold.
Thank you Jeff Pluim; I could not agree more. May I suggest adding to your "things that can save the U.S." list 1.) the people becoming independent and self-reliant again, 2.) eliminating the straglehold of build-in colas that government employees/unions now extract from the tax payers, 3.) reducing government budgets to around 30% of their current levels and 4.) making our elected officials accountable for the state of government with the possiblity of accompanying fines, imprisonment and so forth.
That should get us jump-started.
Jeff if your prediction is right about China ceasing their USD purchases when our debt to them falls below $400 billion, and they hold about twice that now, if the rate they dump it stays constant around $22 billion/month, that gives us around 18 months to go. What will happen then?
There is absoultey no way I would ever invest in China, the other question that I have to ask is if you own GOLD and are telling everyon that it is going to explode in price and could rise of 200% in value why would anyone with an ounce of brain power want to sell something that is going to be worth 2 time what you have invested in it, If I owned GOLD and believed this then I would wait until GOLD his lets say $4,000.00 an ounce surly not when it is worth just $1,200 per ounce.
Don
[...] China Dumps the Dollar as Yields Sink [...]
China level of debt is amazing in midst of global turmoil. Its looks like the economy is self sustaining. Lower total debt creates more room for addtional debts should the economy cool down. Despite third devloped nations recommending China to adopt some of their gorwth strategies, China might never adhere to them as it has its own plans that cushioned effects of global crisis and took them out into gorwth.
China dumping US treasury is not a suprise move as US have been backing support from China on some of the global issues which gave China more power to excel further. Thanks very much for this useful information. I really appreciate it.
What to say:
As the first step, may be, we should avoid buying paper that entitles us to own another piece of paper with many zeros on it. Think of it: You are dishing out your hard-earned money only to own zeros… Are these papers not called those fancy names: derivatives, and futures and what are those shares in investment funds called?
The second step, we should send all those "economics and management gurus" from our ivy-league schools and banks for post-doctoral work at the communist party school in Beijing to learn modern economics.
That is a thought…
mike