Assessing that risk means answering two basic questions. Is China buying fewer foreign assets? And is it diversifying away from the dollar? Few have delved deeper into the murky world of China’s capital flows than Brad Setser of the Council on Foreign Relations in New York, and his analysis suggests a more complex picture than official statistics portray. [1]
Yesterday The Economist confirmed what many Doomers already knew.[1] The CFR’s Brad Setser is the go-to guy for analysis on China and their relationship with American financial obligations. Indeed, Wednesday’s post [2] at his "Follow the Money" blog is yet another must-read on the issue.
This week’s Reuters report [3] showed central bank activity crashing from a near-record treasuries buy in the previous week to a tiny sell-off. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[4] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[5]
In a mammoth swerve of over $31 billion in the figure from last week, central banks sold off $4.612 billion in treasuries. Meanwhile, their modest $4.139 buy of agencies just about canceled out last week’s selloff. The net result was a nothing-burger of a $0.473 billion drop in total holdings.
In a week when, arguably, nothing happened, the big news was that nothing continued to happen. The agencies (red) line has now been almost perfectly flat for nearly a third of a year. Obviously this isn’t a market-driven pattern; someone, somewhere has to be doing this.
Twist’s ratios graphs blipped up a bit on the truly odd reversal in this week’s numbers.
Setser’s 52-week change graph moved little on the small numbers.
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Notes and References
[1]: "Not quite so SAFE: Is China souring on the dollar?", Economist, April 23, 2009.
CHINA is America’s largest creditor. Thanks to a policy of piling up foreign-exchange reserves and investing most of them in dollar assets, China’s government bought around one quarter of the net increase in Treasuries over the past two years. But just as Washington needs to sell record amounts of debt to fund its soaring budget deficit and to bail out its banks, there are signs that Beijing’s appetite for American debt may be shrinking.
According to official figures, China’s reserves fell in January and February. Taking the first quarter as a whole they rose by just $8 billion, compared with $154 billion a year earlier. Chinese officials have voiced pointed public worries about the effect of America’s massive fiscal and monetary expansion on the value of China’s dollar holdings. In a high-profile essay, Zhou Xiaochuan, the governor of the People’s Bank of China (PBOC), recently floated the idea of a global reserve currency. The combination of falling reserves and rising rhetoric has fuelled fears that China is turning its back on the greenback.
[2]: "Forget global imbalances, it is now a Sino-American imbalance", by Brad Setser, Council on Foreign Relations blog, April 22, 2009.
[3]: "Foreign central banks Treasuries holdings down – Fed", by Burton Frierson, Reuters, April 23, 2009.
[4]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.
[5]: The updated data set as a Comma Separated Value (CSV) file is here.
Twist,
I’ll re-post my response to a similar article.
This (China’s) program is evidence of a danger that I have written about for years. China is attempting to create a full circle “domestic expansion” economic model. Yes, just like that of the U.S. of old.
If in fact China can spur internal consumption to a high level (which they freely admit is their goal)they would require more natural resources than the world has to give.
China is currently taking advantage of sagging commodity prices by amassing enormous stocks of metals and other resources that are critical to industry. At the same time, they seem to be losing their appetite for U.S. treasuries.
We must always be vigilant of who loans who money when we consider reserve currencies. The U.S. is the largest debtor nation on the planet. Not so long ago we were the largest creditor nation.