WSJ's marketbeat blog reports about China's short-term treasury binge.
(emphasis mine) [my comment]
January 16, 2009, 3:17 pm
China' s Short-Term Treasury Binge
Posted by David Gaffen
For some reason, many of the market' s long-running hopes and fears revolve around China. Rosy equity valuations for companies expanding into China were justified by the country' s massive population getting wealthier. Economists worried about the U.S.' s ongoing need for China to buy U.S. assets to fund current-account imbalances watch capital-flow data while biting their nails.
As it turns out, in November, China finally did start to reduce their purchases of long-term U.S. debt, but for now it is difficult to explain why. After all, China increased short-term holdings, and it remains the largest holder of U.S. Treasurys, with $681.9 billion.
The U.S. Treasury' s international capital statistics showed that in November, China' s net holdings of long-term U.S. Treasury securities fell by more than $9 billion. However, the country' s short-term holdings rose by $38.2 billion. Determining the motivation here is difficult — it could simply be that China followed the rest of the crowd in jumping headlong into the safest securities possible, or more worrisome factors could be at stake.
“When any creditor shortens the term structure of its holdings, the borrower should probably be cognizant of that, because the creditor is giving up yield to give itself the option of exiting quickly,” says Brad Setser, fellow at the Council on Foreign Relations. “That' s one way to interpret the shortening of the structure of China' s holdings.”
Put more plainly, it opens up the possibility of a rush out of U.S. debt due to deterioration in the confidence of the U.S. financial system. However, Mr. Setser also says that it is also likely that China' s move “reflects less of a decision to shorten term structure, and more a decision or inability to decide what to buy.” It' s a dilemma that many an institutional manager faced in the latter part of 2008 — most asset classes were frightening for one reason or another, and the return of capital promised by short-term Treasurys was the most appetizing bet.
In this case, if yields improve, one might expect to see China move back into the market. In addition, the likelihood of China reducing holdings drastically seems slim, because they would end up strengthening their own currency, which won' t help their export-driven economy. [unless, of course, China begins to experience high inflation]
One area where China has definitively shifted is in the agency market, as its holdings there fell for the fifth consecutive month. Being a large player in the market, it does show that China was having an impact there.
“The trouble that Fannie Mae and Freddie Mac had got foreign investors to pare back their agency holdings, whereas before they had been really big buyers,” says Win Thin, senior currency strategist at Brown Brothers Harriman. “There was enough doubt and uncertainty…whereas with Treasurys, it' s been just one month.”
My reaction: China is giving up yield to give itself the option of exiting quickly from the dollar. Not a development that should inspire confidence in the dollar.
China's real GDP growth slowed to 6.8% in Q4 y/y, the slowest in seven years and a sharp slowing from 9% in Q3 as Chinese exports and manufacturing contracted and investments slowed. Chinese growth has been decelerating for six consecutive quarters and is unlikely to grow more than 4-5% y/y in 2009 as global demand for Chinese goods continues to be weak, investment continues to slow (despite government spending) and domestic demand weakens from job losses, negative wealth effect from equity and property market losses (RGE)
On a quarter on quarter basis Chinese output was negative (an estimated -0.3% annualized- Citi), the first quarterly contraction in 16 years and a number consistent with the plunge in electricity output which is often used by economists as a proxy for growth. Indicators suggest Chinese growth will continue to contract o n a q/q basis again in Q109 despite a possible stabilization as inventories are worn off. Exports have fallen to a year-on-year growth rate of 2%-3%, Manufacturing (40% of GDP) has been in contraction since August, FDI and fixed asset investment have been on a slowing trend.
Estimates for 2009 growth are being rapidly revised down to a 5-7% range from 13% in 2007 and 9% for all of 2008. The IMF suggested it could halve to 5%. Others suggest that negative growth is not out of the question.
MS: While the growth rates of industrial production (value-added) and external trade (both exports and imports) plunged, inflation rates also declined sharply as massive destocking and a severe disruption of trade finance led to a freefall in output. The shock impact of the economic hard landing in 4Q08 contributing to a reassessment of capex plans for 2009, continued economic contraction in G3 economies and continued weakness in the property market suggest very weak growth in H109 - growth is estimated at 5.5% in 2009 (down from the 7.5% expected before)
WB: investment growth declined in 2008, led by real estate and construction. Private investment is expected to weaken in 2009 as the external outlook and that of the property sector weaken even though private consumption may be partially supported by expansionary fiscal stimulus. Global growth weighted by Chinese exports may be somewhat weaker than that in 1998, during the Asian crisis and in 2001 when the “dot.com bubble” burst.
Wachovia: economic growth in China has downshifted further in the fourth quarter but the Chinese economy is not falling apart at the seams, yet, as some of its major trading partners, like the United States, appear to be.
Roubini: In a country with the potential growth of China hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million new workers joining the labor force every year
Well, also the new secretary of treasury in the US, doesn't want a weak Yuan (strong dollar), and he expressed it quite strongly...
Hi Eric!
You have previously said a lot about hyperinflation in Chana which result in dollar devluation. I stuck trying to figure out how it is possible to observe two mutually exclusive trends for the same currency - hyperinflation and revalvation - simultaniously.
Can you explain this to me please?
By the way some guys say devalvation is more likely in china:
http://www.bloomberg.com/apps/news?pid=20601087&sid;=aAZEkBMAM9xY&refer;=home
I used to share thier opinion. Who knows, maybe you can prove the opposite.
Thanks for all the economic info on China amarksp.
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Yohay said...
Well, also the new secretary of treasury in the US, doesn't want a weak Yuan (strong dollar), and he expressed it quite strongly...
Yeah, I am surprised someone is finally asking for it. He is right to want a stronger yuan, but it is a little late for that now. China will end up dropping its dollar peg all on its own due to its soon-to-be out of control inflation.
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Anonymous said...
Hi Eric!
You have previously said a lot about hyperinflation in China which result in dollar devluation. I stuck trying to figure out how it is possible to observe two mutually exclusive trends for the same currency - hyperinflation and revalvation - simultaniously.
Can you explain this to me please?
Hyperinflation and revaluation are not mutually exclusive. For example, if China was experiencing hyperinflation and the US was experiencing even faster hyperinflation, the yuan would rise against the dollar.
Sorry, if I misunderstood your question.
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Anonymous said...
By the way some guys say devalvation is more likely in china:
http://www.bloomberg.com/apps/news?pid=20601087&sid;=aAZEkBMAM9xY&refer;=home
I used to share thier opinion. Who knows, maybe you can prove the opposite.
The article you link to says, "rising unemployment among factory workers will fuel social unrest, threatening the Communist Party's survival and increasing the risk authorities will devalue the yuan to boost exports."
He makes it sound like a costless procedure, right? It is like that in every story you read about the China's dollar peg: no mention of all the money China has to print to maintain it.
Anyway, the fact that China's exports are falling isn't the end of the world for China. Chinese authorities can boost the country's service economy by encouraging consumption to replace shrinking manufacturing sector. Chinese spending makes up only 35% percent of China's gdp (compared to US's 75%), and it would not take much effort to boost that number.