CHINA:The Dumping Begins

[Sapphire Capital]

The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested
Published on 02-09-2010

Source: Zero Hedge

It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.

From Asia Times:

Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

Furthermore, demonstrating just how seriously China is approaching a populist-driven adversarial stance with the US, was earlier speculation that instead of unpegging its currency (a move much desired by the US administration in its goal to further weaken the dollar and make China less competitive in the export market), China would reduce its trade balance not by the traditional way of currency inflation, but by the economic textbook footnote approach of raising salaries.

Higher labor costs would cut Chinese export competitiveness while boosting domestic spending power and sustaining economic growth, according to the bank. Premier Wen Jiabao’s government has been pressed by U.S. and European officials to end a 19- month yuan peg to the dollar to help diminish trade and investment imbalances that contributed to the credit crisis.

“Wage increases are a better option because they largely benefit Chinese workers,” Tao Dong, a Credit Suisse economist in Hong Kong who has covered the Chinese and Asian economies for more than 15 years, said in an interview yesterday. “Currency appreciation will only result in Chinese exporters losing out to competitors in countries such as Malaysia and Mexico.”

The strategy may limit gains in the yuan to 3 percent this year, according to Tao. This month’s 13 percent increase in minimum wage in eastern China’s Jiangsu province indicates that higher pay will play an important role in officials’ efforts to rebalance growth in the fastest-growing major economy, Tao said.

The wage decision “argues against a large one-off yuan revaluation,” Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, wrote in a note this week.

One thing is certain - China will now focus on doing precisely the opposite of what America would urge Chinese authorities to do, in order to establish itself as the focal point of negotiating leverage and increasingly humiliate the Obama regime. If this involves selling USTs or corporates (both fixed income and equities) so be it. This is further confirmed by carefully worded disclosure in today's copy of China Securities Journal:

The China Securities Journal, a government-backed daily, accused the U.S. in a tough-worded front page editorial of playing the "exchange rate card."

It said that, just as China didn't interfere with Federal Reserve purchases of U.S. Treasuries, "the U.S. has no right to interfere in China's exchange rate policy."

"Whether or not to appreciate is our own business," the newspaper said.

"Whether it will appreciate, when and by how much is an integral part of China's monetary policy."

It is not clear when the asset divestiture directive takes place or if it is already being enforced. Judging by the after hours action in futures and the currency markets, some dumping may already be taking place. Alternatively, we now know just who it is that sell into every rally (yes, even in this market, every buyer is matched with a seller).

[fireopal]

Chinese Military: Sell U.S. Bonds To Punish Washington DC
Published on 02-09-2010

Source: Reuters

Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.

The calls for broad retaliation over the planned U.S. weapons sales to the disputed island came from officers at China's National Defence University and Academy of Military Sciences, interviewed by Outlook Weekly, a Chinese-language magazine published by the official Xinhua news agency.

The interviews with Major Generals Zhu Chenghu and Luo Yuan and Senior Colonel Ke Chunqiao appeared in the issue published on Monday.

The People's Liberation Army (PLA) plays no role in setting policy for China's foreign exchange holdings. Officials in charge of that area have given no sign of any moves to sell U.S. Treasury bonds over the weapons sales, a move that could alarm markets and damage the value of China's own holdings.

While far from representing fixed government policy, the open demands for retaliation by the PLA officers underscored the domestic pressures on Beijing to deliver on its threats to punish the Obama administration over the arms sales.

"Our retaliation should not be restricted to merely military matters, and we should adopt a strategic package of counter-punches covering politics, military affairs, diplomacy and economics to treat both the symptoms and root cause of this disease," said Luo Yuan, a researcher at the Academy of Military Sciences.

"Just like two people rowing a boat, if the United States first throws the strokes into chaos, then so must we."

Luo said Beijing could "attack by oblique means and stealthy feints" to make its point in Washington.

"For example, we could sanction them using economic means, such as dumping some U.S. government bonds," Luo said.

The warnings from the PLA come after weeks of strains between Washington and Beijing, who have also been at odds over Internet controls and hacking, trade and currency quarrels, and President Barack Obama's planned meeting with the Dalai Lama, the exiled Tibetan leader reviled by China as a "separatist."

MILITARY SPENDING BOOST

Chinese has blasted the United States over the planned $6.4 billion arms package for Taiwan unveiled in late January, saying it will sanction U.S. firms that sell weapons to the self-ruled island that Beijing considers a breakaway province of China.

China is likely to unveil its official military budget for 2010 next month, when the Communist Party-controlled national parliament meets for its annual session.

The PLA officers suggested that budget should mirror China's ire toward Washington.

"Clearly propose that due to the threat in the Taiwan Sea, we are increasing military spending," said Luo.

Last year, the government set the official military budget at 480.7 billion yuan ($70.4 billion), a 14.9 percent rise on the one in 2008, continuing a nearly unbroken succession of double-digit increases over more than two decades.

The fresh U.S. arms sales threatened Chinese military installations on the mainland coast facing Taiwan, and "this gives us no choice but to increase defense spending and adjust (military) deployments," said Zhu Chenghu, a major general at China's National Defence University in Beijing.

In 2005, Zhu stirred controversy by suggesting China could use nuclear weapons if the United States intervened militarily in a conflict over Taiwan.

The United States switched official recognition from Taiwan to China in 1979. But the Taiwan Relations Act, passed the same year, guarantees Taiwan a continued supply of defensive weapons.

China has the world's biggest pile of foreign currency reserves, much of it held in U.S. treasury debt. China held $798.9 billion in U.S. Treasuries at end-October.

But any attempt to use that stake against Washington would probably maul the value of China's own dollar-denominated assets.

China has condemned previous arms sales, but has taken little action in response to them. But Luo said the country's growing strength meant that time has passed.

"China's attitude and actions over U.S. weapons sales to Taiwan will be increasingly tough," the magazine cited him as saying. "That is inevitable with rising national strength."

[cml1234]

Let Japan re-arm if they will buy technology from the U.S.

[MMM]

as far as I know the Japanese are already doing that but they develop most of their technology themselves and buy only spare parts from the US; they seem to be more China friendly than before, I meet a lot of Japanese in Shanghai and Beijing and even in the "hinterlands" you find them

[MMM]

China Dumping of T Bonds Has Begun; Japan now top US Treasury holder
Published on 02-16-2010

Source: AFP

WASHINGTON — China's holdings of US Treasury bonds tumbled in December, allowing Japan to take over as the top holder of American government debt, according to Treasury data released Tuesday.

China's bond holdings dropped substantially to 755.4 billion dollars in the last month of December from 789.6 billion in November, said the Treasury's international capital data report.

Japan's holdings increased to 768.8 billion dollars in December from 757.3 billion dollars in November, according to the data.

China had grabbed the top position from Japan in September 2008 and gradually increased its US bond holdings in relation to Tokyo until December last year, Treasury figures showed.

Beijing had expressed fears late last year about the safety of its dollar-linked assets in view of Washington's burgeoning budget deficit and the declining greenback at that time as the American economy struggled to emerge from a brutal recession.

US Treasury Secretary Timothy Geithner traveled to Beijing in June to reassure Chinese leaders, saying their money is "very safe" despite the US budget deficit, which he pledged to cut.

But Chinese state media expressed opposition to Beijing's policy of buying massive amounts of US debt, saying the value of China's assets could be battered as a result of the global financial crisis.

US-China relations have deteriorated in recent months with problems seen on multiple fronts.

In the latest dispute, President Barack Obama's administration rebuffed Beijing's demand to cancel his meeting this week with the Dalai Lama.

The deepening public spat over Tibet, a row over US arms sales to Taiwan, China's dispute with Google and trade and currency disagreements, come at a key diplomatic moment, as Obama seeks Chinese help to toughen sanctions on Iran.

Britain was the third biggest holder of US Treasury bonds, worth 302.5 billion dollars in December, rising from 277.6 billion in November.

[Condon]

Foreign demand for US Treasury securities falls by record amount as China reduces holdings
Published on 02-16-2010

Source: AP

A record drop in foreign holdings of U.S. Treasury bills in December sent a reminder that the government might have to pay higher interest rates on its debt to continue to attract investors.

China reduced its stake and lost the position it's held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings.

The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009.

Private analysts, though, were split over the significance of the decline. Some doubted that the drop in foreign holdings of short-term Treasuries signified growing unease about holding U.S. debt. They noted that net purchases of longer-term Treasury debt rose in December by $70 billion.

But other economists saw the decline as a warning signal. They fear that foreigners, especially the Chinese, have begun to worry about record-high U.S. budget deficits and are looking to diversify their holdings.

A sustained drop in foreign demand for dollar-denominated assets could lead to higher U.S. interest rates and falling stock prices. Those trends could threaten the U.S. recovery. But economists said they see no such evidence yet.

The Treasury report showed that China reduced its holdings of Treasury securities by $34.2 billion in December.

Alan Meltzer, an economics professor at Carnegie Mellon University, said China's shift should be a wake-up call for Washington.

"The Chinese are worried that we have unsustainable debt levels, and we do not have a policy for dealing with it," Meltzer said.

He said the Chinese worry that confidence in the U.S. government's ability to repay its debt could erode. That would cause the value of Treasurys and the dollar to fall -- and lead to losses on Beijing's' U.S. debt holdings.

The Obama administration on Feb. 1 released a budget plan that projects the deficit for this year will total a record $1.56 trillion. That would surpass last year's record of $1.4 trillion deficit.

The recession helped drive up the deficits. Tax revenue fell as the economy slowed. And spending undertaken to support the economy and stabilize the financial system worsened the budget gaps.

The administration has pledged to address the budget gaps. President Barack Obama has said he will appoint a commission to recommend ways to trim future deficits. But China and others have expressed doubts about the commitment of the United States to reduce the red ink.

Moody's Investors Service has warned that the U.S. government's top credit rating could be jeopardized if the nation's finances don't improve. Asked about this report, Treasury Secretary Timothy Geithner said this month he was confident the United States "will never" loose its sterling credit rating. He predicted foreigners would keep buying U.S. Treasurys as a safe investment.

Some private economists warned against reading too much into December's drop in foreign purchases of short-term Treasury debt. They noted that the figures are volatile from month to month. They also pointed out that Europe's debt crisis has put pressure on the euro and boosted demand for U.S. Treasurys and the U.S. dollar.

"China may not be too happy with us right now, but you have to ask, what else are they going to do with their money?" said David Wyss, chief economist at Standard & Poor's in New York.

The Treasury International Capital report showed that net foreign demand for long-term securities totaled $63.3 billion in December. This figure includes Treasury debt, debt of government sponsored enterprises such as Fannie Mae and Freddie Mac as well as the bonds sold by private corporations and private company stock.

John Taylor, chairman of hedge fund FX Concepts, predicted that the drop in short-term Treasury holdings would likely be reversed in coming months. In part, he thinks that's because the euro, the main alternative to the dollar, has fallen about 10 percent against the U.S. currency since mid-January.

For December, Japan boosted its holdings of Treasurys by $11.5 billion to $768.8 billion. That figure exceeded China's December total of $755.4 billion and restored Japan's position as the largest foreign owner of Treasurys.

The $53 billion decline in holdings of Treasury bills came primarily from a drop in official government holdings. They fell by $52.3 billion. Holdings of foreign private investors dropped by $700 million in December.

For all of 2009, foreign holdings of U.S. Treasury bills dipped by $500 million. In 2008, foreigners had increased their holdings of short-term U.S. Treasuries by $456 billion. That occurred as a global financial crisis triggered a flight to the safety of U.S. government debt. As a result, the rates the government was paying on its debt fell to record lows. Rates on some short-term securities sank into negative territory for brief periods.

China's holdings are a result of the huge trade deficits the United States runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets.

American manufacturers argue that China's huge dollar reserve reflect Beijing's efforts to keep its currency artificially low against the dollar. That can help boost Chinese exports and dampen demand in China for American products.