On Tuesday evening, we
asked what would happen if emerging markets joined China in dumping US
Treasurys. For months we’ve documented the PBoC’s liquidation of its vast stack
of US paper. Back in July for instance, we noted that China had
dumped a record $143 billion in US Treasurys in three months via
Belgium, leaving
Goldman speechless for once.
We followed all of this up this week by
noting that thanks to the new FX regime (which, in theory anyway, should have
required less intervention), China has likely
sold somewhere on the order of $100 billion in US
Treasurys in the past two weeks alone in open FX ops to
steady the yuan. Put simply, as part of China's devaluation and subsequent
attempts to contain said devaluation, China has been purging an epic amount of
Treasurys.
But even as the cat was out of the bag for
Zero Hedge readers and even as, to mix colorful escape metaphors, the genie has
been out of the bottle since mid-August for China which, thanks to a steadfast
refusal to just float the yuan and be done with it, will have to continue
selling USTs by the hundreds of billions, the world at large was slow to wake
up to what China’s FX interventions actually implied until Wednesday when two
things happened: i) Bloomberg, citing fixed income desks in New York, noted
"substantial selling pressure" in long-term USTs emanating from
somebody in the "Far East", and ii) Bill Gross asked, in a tweet, if China
was selling Treasurys.
Sure enough, on Thursday we got
confirmation of what we’ve been detailing exhaustively for months. Here’s Bloomberg:
China has cut its holdings of U.S. Treasuries
this month to raise dollars needed to support the yuan in the wake of a shock
devaluation two weeks ago, according to people familiar with the matter.
Channels for such transactions include China
selling directly, as well as through agents in Belgium and Switzerland, said
one of the people, who declined to be identified as the information isn’t
public. China
has communicated with U.S. authorities about the sales,said another person. They didn’t reveal the size of
the disposals.
The latest available Treasury data and estimates
by strategists suggest that China controls $1.48 trillion of U.S. government
debt, according to data compiled by Bloomberg. That includes about $200 billion
held through Belgium, which Nomura Holdings Inc. says is home to Chinese
custodial accounts.
The PBOC has sold at least $106 billion of reserve assets
in the last two weeks, including Treasuries, according to an estimate from
Societe Generale SA. The figure was based on the bank’s calculation of how much
liquidity will be added to China’s financial system through Tuesday’s reduction
of interest rates and lenders’ reserve-requirement ratios. The assumption is
that the central bank aims to replenish the funds it drained when it bought
yuan to stabilize the currency.
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