Thursday, February 18, 2010

TIC tock; TIC tock; TIC tock

An article I wrote yesterday on Angry Bear blog:

No, the US Treasury's time is not running out. Where's Brad Setser when you need him - and the media definitely needed him in reference to the December TIC report.

Okay, okay, we know: China dropped its share of Treasury holdings in December by $US 34.2 bn. China now holds just 20.9% of the total foreign-owned stock of Treasuries, second only to Japan (21.3%).

But China’s share is closer to its average, while Japan’s share is way off – there may be a reversion here, i.e., Japan will grow its stock of Treasuries relative to China (Please see my post yesterday). Except for the period of September 2008 through November 2009, Japan held a much larger share of Treasuries than did China for every month since 2000.

Is there a sinister plot developing? Is China selling off S-T T bills to retaliate against the Obama administration’s push on the renminbi? Or is China simply reallocating its portfolio toward risk?

Perhaps there is a (partial) retaliation scheme underway, as suggested by the 3-month accumulation of short-term US assets (mostly T bills agencies with a maturity of less than 1 year).

But isn’t it just slightly more plausible that the Chinese are – official + private – selling off zero-yielding (practically) Treasuries in exchange for longer-duration, higher-yielding, and riskier assets.

The first bit of the story is this: one should take care in not reading too much into the TIC report. It’s just one month’s worth of data; but more importantly, the data miss a critical component of the capital account, foreign direct investment.

The chart above illustrates China's one-year rolling monthly flows of long-term, high quality asset purchases - Treasuries bonds/notes, agencies, stocks, and corporate bonds. The Chinese are accumulating stocks, primarily through private investors, but through official channels as well (see press release, lines 8 and 13). This suggests an increasing interest in equity, which could signal growing foreign direct investment flows (not shown in TIC).

Furthermore, the entire year’s shift in assets, long-term Treasury purchases, +$US 98.8 bn fully offsets the drop in short-term Treasuries, -$US 98.8. This suggests diversification.

Finally, everybody’s doing it, not just China - diversifying away from T bills, that is!

The chart above illustrates the 3-month rolling sum of all foreign net flows of ST US assets (mostly T bills). If you invest $US 1 million dollars today in a bill expiring in August 2010, you make about 900 bucks. Man, doesn’t that sound like a wonderful investment?

So the next question is: why do the Chinese care about return on their F/X holdings? Because they have a peg! Here is a great article for all of you who wanted to know about the costs of maintaining a peg. Accumulating FX reserves is a costly business, and T bills are unlikely to finance the type of sterilization that is needed by the PBoC.

Rebecca Wilder


  1. Love the charts again - and the logic - aj, nb, and br (the Jersey girls)!!!!

  2. I guess that you are in California with Aunt Betty? Have fun! And give my mother a hug for me:)

  3. Hi! we were looking at it together and thought you should know - am home now. What's with the new format? Is it easier?? aj

  4. @ FT alphavile today: The illusory China-selling TIC data

    (By Standard Chartered’s reckoning about 90 per cent of net purchases of US Treasuries made by British institutions in 2009 were on behalf of SAFE, which manages the PRC’s foreign currency reserves)