The comments by People’s Bank of China Gov. Zhou Xiaochuan are setting a framework for talks on how to resolve the huge trade imbalances between China and the U.S., analysts said. [1]

That same MarketWatch report asserted that China’s and Japan’s central banks would be maintaining their Treasury Debt holdings.[1] Setser has a long analysis [2] and HuffyPo is seeing an "Anti-Dollar Contagion" [3] taking shape. There’s intense interest in this issue as the G20 approaches. Later, after Treasury Secretary Tim Geithner’s famous visit to the CFR, Brad (who’s based there) posted a fresh assessment of the situation where he noted that in the scheme of things China’s US bondholdings are at only about half the level of, say, America’s money-market industry.[4] He also contributed a nuanced assessment of Geithner’s recent performance in the comment thread …

March 26th, 2009 at 9:16 pm

John McLeod responds:

Good to know that China’s holdings of US obligations aren’t terribly critical in the larger scheme of things …

Been wondering all day what you thought of Tim’s recent visit to your office. I can’t imagine you were away for that one ;-)

March 26th, 2009 at 9:33 pm

bsetser responds:

Mr. Geithner’s comments today were far more significant, and I applaud his call to expand the regulatory net/ push derivative trading onto organized exchanges. I also thought his supposed gaffe on China wasn’t really a gaffe. It was clear that Geithner was talking about the portions of Zhou’s paper that discuss expanding the existing role of the SDR, i.e. within the context of the IMF (and there the US and China may well find common ground; Geithner clearly wants to increase the financing available to the IMF) not to the portions of Zhou’s paper that refer to the creation of a new supranational currency.

 

……….

Later: Now here’s something different, an analysis from Al Jazeera on the issue – part 1 & part 2

Obviously there’s room for differences of opinion between the amateurs (e.g. us) and the Grownups. However, the NY Fed doesn’t lie. Watch this space to see how the cenbank’s actual holdings of treasuries and agencies move in practice over the next few weeks.

But in connection with the idea that America may have to cut back to save its reserve currency status against this new SDR coalition, twist sent along this fascinating article [5] by American super-patriot Paul Craig Roberts. Roberts makes a pretty sound argument for preserving the American Empire by pulling back from the extremities in much the same way the Romans did after the Battle of the Teutoburg Forest. However, the self-inflicted implosion of much of the foundations of the US economy following 9/11 was a lot less dramatic than the Romans losing legions XVII, XVIII and XIX in combat, so his prescriptions likely won’t get much traction. Roberts seems to foresee this, noting that because the Iraq and Afghanistan wars have been financed using off-budget allocations, any accounting benefits of terminating the wars would be only Out-Year. The article makes several other important observations, including a warning on CMBS that is underscored by Lingling’s lastest effort.[6]

But to return to our foreign central banks, they’re maintaining those treasuries holding all right. This week’s Reuters report [7] was quiet. Ominously quiet. The current Agency Debt figure is essentially unchanged (down $0.172 billion) from 10 weeks ago, and the Treasury Debt level is up only $2.859 in the last 3 weeks, a buy rate of just $0.136 billion a day since March 4th. Whoever besides the Fed is buying all those new T-bills and Agency Debt, it sure ain’t cenbanks. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[8] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[9]

Cenbanks bought $5.031 billion of treasuries and sold $2.679 billion of agencies this week, for a total rise in US obligations of $2.352. You can see from twist’s bar graphs that that’s barely in the noise. Looks like the official buyers for US bonds are barely rolling over their maturing stuff.

With the agencies line having been perfectly flat for a month and a half, the treasuries line seems to have flattened out too. These charts might indicate a pause prior to the G20 conference and the currency policy discussions that are supposed to happen there. WaPo is seeing some discomfort in the bond markets,[10] and it’s possible a trend up or down won’t reemerge before the US’s and China’s warm exchanges cool down a bit.

Twist’s ratios graphs are just sort of drifting around.

And the treasuries line in Setser’s 52-week change graph is also heading mostly sideways, as the agencies line drifts slowly downwards.

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Notes and References

[1]: "China not fooling in call for review of dollar’s status", by Chris Oliver, March 25, 2009.

No Treasury unwinding

Zhou did not, however, say China’s central bank had any plans to diversify its U.S. debt holdings. China has the world’s largest foreign exchange reserves, and it is also the biggest holder of U.S. Treasury securities.

In fact, Zhou’s proposal came as his No. 2 — People’s Bank of China Deputy Gov. Hu Xiaolian — was quoted as saying U.S. government debt is "an important element of China’s investment strategy of its foreign currency reserves." See full story on Hu’s comments.

Meanwhile, Japan, the U.S.’s staunchest ally in Asia, said Wednesday it too does not have plans to change its policy of investing a majority of its foreign reserves in U.S. Treasurys.

[2]: "China’s call for a new international financial system", by Brad Setser, Council on Foreign Relations, March 24, 2009.

[3]: "Anti-Dollar Contagion Gains Pace", by Michael J. Panzer, Huffington Post, March 24, 2009.

[4]: "China v US money market funds", by Brad Setser, Council on Foreign Relations, March 26, 2009.

[5]: "Is the Bailout Plan Breeding a Greater Crisis?", by Paul Craig Roberts, VDare, March 25, 2009.

The Fed cannot monetize new Treasury issues without the word getting out. If and when this happens, the US dollar’s exchange value is likely to drop while interest rates and inflation rise.

To avoid a crisis of this magnitude, the US needs to focus on saving the dollar as reserve currency. As I previously emphasized, this requires reducing US budget and trade deficits.

Despite the near-term budget costs of ending the occupation of Iraq and the war in Afghanistan, terminating these pointless military adventures would produce immediate large out-year budget savings. Closing many foreign military bases and cutting a gratuitously large military budget would produce more out-year savings.
…

More budget savings could come from a different approach to the financial crisis. The entire question of bailing out private financial institutions needs rethinking. The probability is that the bailouts are not over. The commercial real estate defaults are yet to present themselves.

[6]: "Commercial Property Faces Crisis: Delinquency Rate at 1.8%, Near Peak of Last Recession; Parallels to S&L Debacle", by Lingling Wei, Wall Street Journal, March 26, 2009.

Since late 2007, a total of 47 banks and savings institutions have failed, of which a dozen or so had unusually high commercial-mortgage exposure. Foresight Analytics in Oakland, Calif., estimates the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn. The research firm projects that more than 700 banks could fail as a result of their exposure to commercial real estate.

[7]: "Foreign central bank U.S. debt holdings rise", by Ellen Freilich, Reuters, March 26, 2009.

[8]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[9]: The updated data set as a Comma Separated Value (CSV) file is here.

[10]: "Stocks Up After Seesaw Session: Upbeat Reports Tempered by Poor Treasurys Auction", by Alejandro Lazo and Renae Merle, Washington Post, March 25, 2009.

There were also fewer foreign bidders at the table. They made up 30 percent of bidders yesterday, compared with 49 percent during the last auction in February, Giddis said. Bond holders would be concerned that foreign buyers are becoming less interested in buying up U.S. government debt, he said.

"The market is starting to get very keen on what foreign central banks are doing, what they’re not doing, as it pertains to buying Treasurys," Giddis said.