Notice US Tsy yields fell to their lows even with China reducing holdings.
The fear mongerers will just tell us to thank goodness someone else came in to replace them, and that without the Fed buying it’s all over for the US, etc.
To which I say, it’s just a reserve drain, get over it!
And if you don’t understand that, try educating yourself before you sound off.
Interesting they are letting overseas banks invest in their bond markets.
Maybe a move to help strengthen their currency?
They can see the $ reserves aren’t coming in as before?
Or overseas banks bought their way in, looking to profit?
Or the next generation western educated Chinese thinks an expanded financial sector is a prerequisite to growth?
In any case, looks like another western disease has spread to China.
China Headlines,
China Threatened By Export Risk After Eclipsing Japan
China Reduces Long-Term Treasuries by Record Amount
China Economic Index Rises, Conference Board Says
China to Let Overseas Banks Invest in Bond Market
China Lags Behind on Key Measures After Surpassing Japan: Govt
Foreign Investment in China Climbs for 12th Month
Yuan Gains Most Since June as China Favors Greater Volatility
China Copper Consumption Growth to Slow, Antaike Says
Hong Kong Jobless Rate Slides to Lowest in 19 Months
Singapore Exports Cool as Government Predicts Slowing Demand
By Wes Goodman and Daniel Kruger
August 17(Bloomberg) — China cut its holdings of Treasury notes and bonds by the most ever, raising speculation a plunge in U.S. yields has made government securities unattractive.
The nation’s holdings of long-term Treasuries fell in June for the first time in 15 months, dropping by $21.2 billion to $839.7 billion, a U.S. government report showed yesterday. Two- year yields headed for a fifth monthly decline in August, falling today to a record 0.48 percent.
Two-year rates will rise to 0.85 percent by year-end as the U.S. economy rebounds in 2010 from a contraction in 2009, according to Bloomberg surveys of financial companies. Reports today will show improvement in housing and manufacturing, signs of stability even as growth is less than expected, analysts said.
“Buying now is a big risk,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “I don’t recommend it. The economy is stable.”
Investors who purchased two-year notes today would lose 0.4 percent if the yield projection is correct, according to data compiled by Bloomberg.
The economy will expand at a 2.55 percent rate in the last six months of 2010, according to the median of 67 estimates in a Bloomberg survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.
Housing, Production
China’s overall Treasury position fell for a second month in June to $843.7 billion.
“This may have been opportunistic,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 18 primary dealers that trade with the Federal Reserve. “Look at the level of yields. If you’ve held a lot of Treasuries, you’ve done well.”
The People’s Bank of China on June 19 ended a two-year peg to the dollar, saying it would allow greater “flexibility” in the exchange rate. The currency has since strengthened 0.5 percent.
The central bank limits appreciation by selling yuan and buying dollars, a policy that has contributed to its accumulation of the world’s largest foreign-exchange reserves and led to the build-up of its Treasury holdings.
Domestic Investors
Treasury yields fell as U.S. investors increased their holdings to 50.5 percent, the biggest share of the debt since August 2007 at the start of the financial crisis, amid signs that a recovery from the longest contraction since the Great Depression has lost momentum.
U.S. reports last week showed retail sales increased in July less than economists forecast and inflation held at a 44- year low.
The two-year note yielded 0.50 percent as of 12:19 p.m. in Tokyo. The 0.625 percent security due in July 2012 traded at a price of 100 7/32, according to data compiled by Bloomberg.
China, with $2.45 trillion in foreign-exchange reserves, turned bullish on Europe and Japan at the expense of the U.S.
The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($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.
Diversification Strategy
“Diversification should be a basic principle,” Yu, president of the China Society of World Economy, said in an interview last week, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets. Instead we bought quite a lot.”
China held 10 percent of the $8.18 trillion of outstanding Treasury debt as of July. Investors in Japan hold the second- largest position in Treasuries with $803.6 billion of the securities, or 9.8 percent. Total foreign holdings rose 1.2 percent to a record $4.01 trillion, the Treasury said. China’s holdings peaked in July 2009 at $939.9 billion.
China needs a strong U.S. dollar, said Kenneth Lieberthal, a senior fellow specializing in China at the Brookings Institution, a research group on Washington.
“I don’t think we’re going to see any massive flight from China’s holdings of U.S. debt,” Lieberthal said on Bloomberg Television. “That would be self defeating and they well recognize that.”
August 17 (Bloomberg) — China will let overseas financial institutions invest yuan holdings in the nation’s interbank bond market in a pilot program to spur currency flows from abroad.
The People’s Bank of China will start with foreign central banks, clearing banks for cross-border yuan settlement in Hong Kong and Macau, and other international lenders involved in trade settlement, according to a statement on its website today.
“It’s a big boost for the offshore renminbi market,” said Steve Wang, a credit strategist for Bank of China International Securities Ltd. in Hong Kong. It “would allow offshore holders of yuan to invest the money directly in China rather than going through middlemen. It’s a step in the right direction that really opens the domestic securities market.”
The move comes as China seeks to broaden the use of its currency. The nation approved use of the yuan to settle cross- border trade with Hong Kong in June 2009, part of a drive to reduce reliance on the U.S. dollar. The popularity of that program was limited by the investments available in the currency.
Each overseas bank needs a special account at a local lender for debt transaction clearing, according to the regulations, which come into effect from today. Overseas banks must first apply for investment quotas on the interbank market, the central bank said. Foreign central banks should disclose funding sources and investing plans in their applications, according to the central bank.
There were a total 14.3 trillion yuan ($2.1 trillion) of bonds on the interbank market as of June, including debt issued by the central government, banks and companies, the central bank said July 30. That amount accounted for 97 percent of total debt outstanding.
Yuan Deposit Growth
Yuan deposits in Hong Kong climbed 4.8 percent in June to a record as China ended a two-year peg against the dollar. Currently, trade is the main way for offshore holders of yuan to return money to China, Wang said.
The program is a step forward to internationalization of the renminbi, said Dariusz Kowalczyk, a currency strategist at Credit Agricole CIB in Hong Kong. The Chinese currency, the yuan, is also known as the renminbi.
“By opening the new avenue to invest Chinese yuan funds, the currency will become more attractive and may come under further upward pressure in the offshore market in Hong Kong,” Kowalczyk said. “Foreign central banks may decide to begin the process of diversifying their reserves into Chinese yuan.”
