Still Buying Treasurys…

Today’s report that China’s holdings of Treasurys slipped to US$889 billion in January 2010 surely added grist to the fire surrounding the heightened tensions in the pivotal bilateral relationship.  These tensions are coming to a head in U.S. and Chinese legislative sessions and imply that coming weeks and months may be filled with more posturing as we wend our way to a series of bilateral and multilateral meetings.  Policy makers from both countries are starting to draw lines in the sand and it remains to be seen how far they will go to defend these lines. This posturing, if it is posturing, could be counterproductive in the long-term. Both sides are sorting out how strong their hands are…More on this to come from us later this week.

From the U.S. in particular, the pressure is ramping up from all policy sides and Yves Smith even suggests that pushing China on economic policy could be one of the wins that the Obama administration is looking for. Yet, as noted in a recent analysis piece, the U.S. treasury data likely still understates Chinese purchases of Treasury-bonds.  In January, UK holdings of US Treasurys climbed by US$28 billion. Some of those likely reflect purchases that will eventually end up in the Chinese ledger.  Historically around 70% of UK treasury holdings reflect those actually purchased by China. By this count, China’s treasury holdings still seem to be inching towards US$1 trillion.

Other takeaways from the TIC data include:

  • Oil exporters continue to add gradually to their Treasury holdings, perhaps a reflection of the restart of Saudi reserve growth, which climbed slightly (US$4 billion) in January as well as the desire for more liquid assets among other oil exporters.
  • An almost US$20 billion reduction in Russian holdings of short-term Treasurys and a much smaller  US$0.5 billion decrease in longer duration holdings. The decrease in Russian holdings of Treasurys is greater than the reduction of Russia’s reserve growth, suggesting that there may have been some truth to diversification rumors.
  • A reduction (perhaps temporary) in long-term capital flows into the U.S. – something worth watching.

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