Most mornings, I take my ‘news bath’ early (around 0430 EST) before writing my first postings. And among my first stops are the UK Telegraph business blogs and, in particular, Malcolm Moore’s ‘What’s Happening in China Today’. Moore operates out of Shanghai and provides invaluable links to matters of note in and about China.
Today, Moore links to a piece by Brad Setser of the Council on Foreign Relations discussing China’s continuing purchases of US Treasuries, even as China has slowed its purchases of US ‘Agencies’ – direct obligations of US government agencies and government-sponsored enterprises. (For a good brief discussion of the different types of US government debt instruments, read Fabozzi’s and Fleming’s paper on the New York Fed site).
As Setser observes, conventional reporting has been that China was beginning to balk at US debt purchases. The reality seems a bit different and a bit more complex, however. While China’s foreign exchange accumulation has slowed across the board, its purchases of ‘Treasuries’ – direct US government debt obligations – has increased in spite of China’s public complaints about the safety of US financials.
While China – and virtually every other foreign investor – has shifted out of Agencies, sales of short and long term Treasuries (‘bills’ and ‘notes’) went up, up, up. Here are a couple of charts lifted from Setser’s posting.
The first shows the overall purchase of Treasuries. See any precipitous decline?
And this chart shows a comparison of Treasuries to Agencies:
The reason for the drop in ‘Agency’ purchases is not hard to figure out. Unlike Treasuries, Agencies are not normally backed by the full faith and credit of the US Government. And given the news out of Washington, would you buy debt instruments from Freddie or Fannie? Not bloody likely.
Ever wonder why the dollar has held up thus far (although its longer-term prospects remain doubtful)? Setser’s high-level summary is probably spot on the money (pun intended).
The fact that key foreign investors didn’t lose faith in Treasuries when they lost confidence in the debt of the Agencies, private US financial institutions and issuers of asset-backed securities helps to explain the dollar’s resilience during this crisis.
There frankly isn’t much more to say about the TIC data these days. Foreigners are consistently buying only one type of US asset. Ok, there was a bit more foreign interest in US equities in March too. But the scale of the inflow into equities was dwarfed by the inflow into Treasuries.
I understand the logic of this flow.
The crisis reminded central bank reserve managers that they cannot take much credit risk. They cannot – politically – afford to take visible losses. And as long as they report their reserves in dollars, holding Treasuries is the one safe choice. Some central banks and sovereign funds also underestimated their needs for liquidity. Kuwait and Abu Dhabi, for example, have had to draw heavily on their foreign assets to finance domestic bailouts.
At the same time, China’s increasingly rhetoric isn’t an accident. It reflects what seems to be a widespread sense inside China that US treasuries aren’t a good investment.** Private Chinese savers presumably wouldn’t want to buy Treasuries at current rates. But China’s current exchange rate regime compels China to buy dollars when private Chinese investors don’t want them.*** The result: a strange world where China’s government ends up buying an asset that China’s people currently do not want …
