China reduces long term treasuries by record amount

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

China Reduces Long-Term Treasuries by Record Amount

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.”

China to Let Overseas Banks Invest in Bond Market

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.”

China Yuan Pledge Suggests Peg to Dollar May Go

Reads to me like they don’t like the yuan strength vs the euro which means it could weaken vs the dollar if they buy euro instead of dollars as suggested below:

China Yuan Pledge Suggests Peg to Dollar May Go

June 19 (Bloomberg) — China’s central bank said it will allow a more flexible yuan after the nation cemented its economic recovery, indicating the currency’s 23-month- old peg to the dollar may be scrapped.

The yuan’s 0.5 percent daily trading band will remain unaltered, the central bank said in a statement on its website today.

“The central bank’s statement means China’s exit from the dollar peg,” saidZhao Qingming, an analyst at China Construction Bank in Beijing. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.”

Allowing the yuan to strengthen may curb inflation by reducing the cost of imported goods and limit the need for central bank dollar buying, which has left the nation with $2.4 trillion in currency reserves. A stronger Chinese currency may also help avert a trade war after U.S. lawmakers urged President Barack Obama to use the threat of trade sanctions to force a policy change.

“The global economy is gradually recovering,” the central bank said today. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the renminbi exchange rate regime and increase the renminbi exchange rate flexibility.”

The central bank was using another word for the yuan. The currency has been trading at about 6.83 per dollar since July 2008.

CH News

Check out the property story below.

And they do seem very worried about inflation.

Not sure if they can control it without triggering a crash.

Maybe.

China’s Stocks Have ‘Corrected Enough,’ BofA Says
China’s Monthly Car-Sales Growth Slows Amid Inflation
China Think Tank Sees 4.2% Inflation, Urges Yuan Flexibility
‘Measures to cool property already working’
New loans set to grow in April


‘Measures to cool property already working’ (China Daily) The skyrocketing prices of property could harm the financial security and social stability of the nation, Qi Ji, vice-minister of housing and urban-rural development, said. “Excessive gains in prices are mainly due to a shortage of supply, and a major part of the demand for housing is due to unreasonable demand,” Qi said. “The government will strictly carry out current measures to curb such demands,” he said. Hangzhou, capital of eastern Zhejiang province, saw a 72.55-percent month-on-month plunge in properties sold during the week ending April 25. Beijing witnessed a 45-percent fall in property sales, while in Shanghai the drop was 38 percent, according to China Index Research Institute. EverGrande Real Estate is reportedly offering a 15-percent discount to push sales of apartments in one of its housing developments in Guangzhou, capital of Guangdong province.
New loans set to grow in April

New loans set to grow in April(China Daily) Analysts expect new loans to exceed 600 billion yuan ($87.88), or even top 700 billion yuan, in April, after dipping to 510.7 billion yuan in the previous month. The central bank is scheduled to release April lending figures next week. Mounting inflationary pressure and asset bubble risks are clouding the Chinese economy this year after nearly 9.6 trillion yuan in new loans flooded into the market in the previous year. The central bank revived the lending quota mechanism, a method to cope with economic overheating in early 2008, to help contain credit growth. To this end, Chinese lenders are allowed to give out roughly 2.25 trillion yuan in new loans in the second quarter, accounting for 30 percent of the 7.5 trillion yuan target set by the authority. In the first three months, more than one third of the 2.6 trillion yuan in new loans was directed to real estate developers and homebuyers.

Inflation in China?


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The circumstantial evidence builds that there’s already an inflation problem, politically, probably due to those up and coming kids with the western educations at the finest schools pestering their elders about it.

And, if so, when foreign direct investment loses its profitability due to rising domestic costs, the currency fundamentals could work to drive it lower, taking away the presumed option of reducing the cost of imports by letting it float higher.

An early warning might be a shrinking of the size of the premium in the currency forwards.

It seems possible that Chinese officials could allows their currency to strengthen in the first two weeks of Feb prior to the beginning of the Chinese New Year holidays. If there is one thing that Chinese officials fear the most it is inflation – inflation is the only thing that can touch everyone in China and continued low inflation is the best way to prevent social unrest. Clearly they are looking to any way they can to tighten financial conditions and stronger fx would be one component. It is interesting that recent press reports stated that Chinese officials wanted to call back January loans made to recent borrowers, possibly reducing the windfall speculative borrowers would get in a one time revaluation.


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NYT: China central bank is short of capital


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Main Bank of China Is in Need of Capital

by Keith Bradsher

HONG KONG — China’s central bank is in a bind.

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

This was part of a ‘weak yen’ policy designed to support exports by keeping real domestic wages in check.

Those investments have been declining sharply in value when converted from dollars into the strong yuan,

Why should they care?

What matters from an investment point of view is what the USD can buy now, what the yuan can buy.

casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

Doesn’t matter what currency the bank’s capital is denominated in because he doesn’t know it matters.

The government has infinite yuan to spend without operational constraint; so, stated yuan capital doesn’t matter.

Now the central bank needs an infusion of capital.

Why? That’s a self-imposed constraint. Operationally central banks don’t need a local currency capital.

Central banks can, of course, print more money, but that would stoke inflation.

Operationally, this makes no sense. There is no such thing as ‘printing money’ apart from actually printing a pile of bills and leaving them on a shelf, which does nothing.

If they spend those bills, that’s government deficit spending with the same effect as any other government deficit spending.

‘Printing money’ has nothing to do with anything.

Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.

Yes, there are self-imposed constraints imposed on various agencies of the government.

There are no operational constraints.

The central bank’s predicament has several repercussions. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts.

The way they keep a strong currency down is by buying more USD.

A weak currency goes down on its own.

To make a weak currency rise, you have to see your USD.

This could heighten trade tensions with the United States.

Yes.

The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit.

Yes, but if the yuan has turned fundamentally weak, the way for the US to keep it from falling is for the US Treasury to buy yuan.

The central bank has been the main advocate within China for a stronger yuan.

They want to fight inflation by keeping nominal input costs down.

But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan.

Right, they want to support exports by keeping real wages down.

As the yuan slips in value, China’s exports gain an edge over the goods of other countries.

The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the former division chief for China at the International Monetary Fund.

“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.

True.

This matters for foreign exchange policy. In the US, Japan, and others, the Treasury makes the foreign exchange decisions, not the Central Bank. And this if far more potent than interest rate policy.

Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates. When interest rates rise, the prices of bonds fall.

Those are not risks, as above.

Officials at the central bank declined to comment, while finance ministry officials did not respond to calls or questions via fax seeking comment. Data in a study by the Bank of International Settlements based in Basel, Switzerland, sometimes called the central bank for central banks, shows that many central banks had small capital bases relative to foreign reserves at the end of 2002,

They don’t need any capital base relative to foreign exchange holdings.

Foreign exchange holding are themselves capital.

though few were as low as the People’s Bank of China.

Given the poor performance of foreign bonds, the Chinese government could decide to shift some of its foreign exchange reserves into global stock markets.

If they shift to financial assets denominated in other currencies, this serves to shift the value of the yuan vs those currencies.

Stocks vs bonds is an investment decision only.

The central bank started making modest purchases of foreign stocks last winter, but has kept almost all of its reserves in bonds, like other central banks.

The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value.

The central bank’s difficulties do not, by themselves, pose a threat to the economy, economists agree. The government has ample resources and is running a budget surplus. Most likely, the finance ministry would simply transfer bonds of other Chinese government agencies to the bank to increase its capital. But even in a country that strongly discourages criticism of its economic policies, hints of dissatisfaction are appearing over China’s foreign investments.

For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”

Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities. With aircraft carriers costing up to $5 billion apiece, $1 trillion would, in theory, buy 200 of them.

By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.

The yuan has risen 21 percent against the dollar since China stopped pegging its currency to the dollar in July 2005.

The actual declines in value of the central bank’s various investments are a carefully guarded state secret.

Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.

China spent more than one-eighth of its entire economic output last year on foreign bonds, and then picked up the pace during the first half of this year. Chinese officials have suggested in recent comments that they are increasingly interested in stopping the yuan’s rise, and thus are willing to continue buying foreign securities to support the dollar. In fact, the yuan weakened slightly against the dollar last month after 26 consecutive months of gains.

Along with Treasuries, China has invested heavily in mortgage-backed bonds from Fannie Mae and Freddie Mac, the struggling mortgage finance giants that are sponsored by the United States government. Standard & Poor’s estimates China’s holdings at $340 billion.

Some bond traders suspect that the central bank has scaled back its purchases of these securities, as have China’s commercial banks. But the central bank trades this debt through many third parties in many countries, making its activity opaque to outside analysts.

The central bank has gone to great lengths to maintain its foreign purchases. The money to buy foreign bonds has come from the reserves required that commercial banks must deposit with the central bank. In effect, China’s commercial banks have been lending the central bank more than $1 trillion at an interest rate of less than 2 percent.

To keep the banks strong when they were getting such little interest on their reserves, the central bank has kept deposit rates low. The gap between what banks are paying on deposits and the rates they are charging ordinary customers to borrow is several percentage points. This amounts to a transfer of wealth from ordinary Chinese savers to the central bank and on to Americans who are selling their debt to the Chinese.

The central bank is now under considerable pressure to reduce the commercial banks’ reserve requirements to encourage growth as the Chinese economy shows signs of slowing.

Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.


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