China keeps buying Treasuries
A little while ago, a rumor was frequently heard around in the markets that China, the world largest holder of foreign reserves, is going to diversify its portfolio away from the US dollar assets like the Treasury securities in favor of, say, euro bonds like German Bunds. In March 2009, Zhou Xiaochuan, governor of People's Republic of China, dared to argue for a gradual move towards using IMF's Special Drawing Rights as a global reserve currency, criticizing the dollar as too much concentrated in global foreign reserves.
China's intention was to shun the dollar's decline as the Fed launched the first quantitative monetary easing in the mid March 2009, because the country accumulated a staggering amount of the Treasury securities immediately after the Lehman crisis in September 2009 crushed the US stock and MBS markets China heavily invested in. But now it looks like China isn't raising a voice against the dollar.
Why? The reason is simple: the dollar hasn't depreciated so much since then, in part due to the Greek crisis that smacked the euro down to the four-year low in 2010. This enables China to feel safe still buying the dollar assets, especially the Treasuries.
China is using UK custodians to keep its dollar assets, which is reflected in the graph above. Given a steady increase in China's foreign reserves, the UK holdings of US Treasuries would shift to China's in the next revision of statistics, hence lifting the country's holdings upward more in line with foreign reserves.
Nonetheless, China's appetite for euro assets hasn't languished at once. The country bought more than 230 billion yen of Japanese short-term bonds in January to July this year, but sold all of them for only two months of August and September. The reason is that China needed a temporal vehicle to lay aside money to flee from the Greek crisis, so it got back to the euro once the crisis stabilized.
Does China keep investing in the dollar? Nobody knows for sure. However, given the eurozone crisis, which is now involving Spain, the world's ninth largest economy, doesn't seem to subside soon, China's words for diversification would be seen as only a bluff.
China's intention was to shun the dollar's decline as the Fed launched the first quantitative monetary easing in the mid March 2009, because the country accumulated a staggering amount of the Treasury securities immediately after the Lehman crisis in September 2009 crushed the US stock and MBS markets China heavily invested in. But now it looks like China isn't raising a voice against the dollar.
Why? The reason is simple: the dollar hasn't depreciated so much since then, in part due to the Greek crisis that smacked the euro down to the four-year low in 2010. This enables China to feel safe still buying the dollar assets, especially the Treasuries.
China is using UK custodians to keep its dollar assets, which is reflected in the graph above. Given a steady increase in China's foreign reserves, the UK holdings of US Treasuries would shift to China's in the next revision of statistics, hence lifting the country's holdings upward more in line with foreign reserves.
Nonetheless, China's appetite for euro assets hasn't languished at once. The country bought more than 230 billion yen of Japanese short-term bonds in January to July this year, but sold all of them for only two months of August and September. The reason is that China needed a temporal vehicle to lay aside money to flee from the Greek crisis, so it got back to the euro once the crisis stabilized.
Does China keep investing in the dollar? Nobody knows for sure. However, given the eurozone crisis, which is now involving Spain, the world's ninth largest economy, doesn't seem to subside soon, China's words for diversification would be seen as only a bluff.
posted by Akihiro Gotoda at
9:00 AM
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