China is finally buying fewer US Treasuries, StanChart says

Posted by Tracy Alloway on Jun 20 12:06.

After numerous false starts, China appears to be buying fewer US assets.

At least, according to the analysts over at Standard Chartered.

Here’s why:

Today we present evidence which suggests that China is buying fewer US dollar (USD) assets with its new FX reserves. We do not make this claim lightly. Official Treasury International Capital (TIC) system data on China’s US Treasury and T-bill purchases does not capture all of China’s buying activities, and can therefore be misleading. Cue lots of headlines about China being a net seller of US securities in recent months. It’s finally happened.

But many are now wise to the fact that China’s State Administration of Foreign Exchange (SAFE) buys through its UK and Hong Kong brokers, and that the monthly TIC data published by the US Treasury is based on where orders are booked rather than the location of the ultimate buyer. Each year, though, the annual TIC survey (published in April by the US Treasury) finds that China holds many more US assets than the previous 12 months’ TIC numbers have suggested. We have shown in previous reports that the upward adjustment of China’s holdings is equivalent to all of the purchases by UK and Hong Kong buyers in the previous 12 months. So far, nothing new.

But here comes the sting. Over the last few months, a large disparity has emerged between China’s new FX reserve accumulation (our estimates are based on official FX reserve numbers, adjusted for portfolio valuation effects) and total net purchases of US Treasuries and T-bills by buyers in China, London and Hong Kong. We track these three groups of purchases together to get around the problem outlined above. To eliminate some of the month-to-month volatility, we have calculated three-month rolling sums. As Chart 1 shows, the gap is new and large.

In fact, the difference between China’s new FX reserves and its purchases of US assets has grown to a record gap of $150bn this year, or 76 per cent of China’s total FX reserves. Now unless China has found a new way of disguising its US Treasury purchases (which, admittedly, is entirely possible) it looks like something has changed here. China is buying something else. Something non-American.

As for what, specifically, StanChart can only really speculate.

But they figure it’s probably European stuff. China has been very public in buying hefty amounts of the bonds issued by the European Financial Stability Facility (EFSF) and also, to a lesser extent, the European Financial Stability Mechanism (EFSM). But even that, StanChart estimates, probably only adds up to 4 to 6 per cent of total of total issuance, or $3.6bn — far below that $150bn gap.

So, StanChart reckons, China may be buying other European stuff too. Stuff like your basic eurozone government bonds or euro-denominated corporate debt. If China bought 5 per cent of total European corporate issuance to date, that would come to $72bn — somewhat closer to the $150bn figure. Throw in some German bund-buying, and some French debt-acquiring, and you get another $24bn.

As for why China would want to buy European paper — in the midst of the debt crisis — here’s why.

The ever-pervasive search for yield and a pick-up of more than 120 basis points:

Plus, you know, the chance to stick it to the Americans.

Related links:
US Treasuries – they are a-changin’ – FT Alphaville
Treasuries of the Carribean – FT Alphaville, 2009
China’s Treasury confidential – FT Alphaville, 2009

This entry was posted by Tracy Alloway on Monday, June 20th, 2011 at 12:06 and is filed under Capital markets. Tagged with , , , , , , , .

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