The exact allocation of China’s USD2.5trln in FX reserves is a closely guarded secret.  One of the only public sources of information on the subject is provided by the US Treasury’s TIC data.  The TIC data represents the Treasury’s attempt to keep track of foreign investments in US securities.  It provides, amongst other things, a headline reading on China’s holdings of US Treasuries.

TIC data for June came out yesterday and it made interesting reading - showing China’s holdings of Treasuries down USD24.0bln to USD843.7bln, from USD867.7bln in May.  Even worse, the fall in holdings came mainly from net sales of long term notes and bonds, not short maturity T-bills. 

What does it mean?  Is China finally loosing faith in the US?  My view is that the monthly TIC data does not do a very good job of capturing China’s purchases and that we need to wait for a few more months data, and maybe even the Treasury’s annual survey, to see what is really going on. 

But Zhang Ming of the Chinese Academy of Social Sciences thinks this might be a turning point in the allocation of China’s FX reserves.  This is my translation of the main points of an opinion piece he ran in the 21st Century Business Herald today:

‘The latest TIC data shows China’s holdings of US Treasuries down for a second month.  Even more striking is that most of the fall comes in our holdings of long term Treasuries - which are more risky investments. 

This might mark a turning point in China’s allocation of its FX reserves.  It might mark the point when Chinese investors came to understand the risks of investment in US Treasuries from inflation in the US or a depreciation of the US dollar.

At the moment, markets are focused on the risks in Europe.  But actually, in the long term perspective, the risks in the EU are less than they are in the US.  The average fiscal deficit and debt/GDP ratio for eurozone members is lower than in the US.  And whilst the eurozone countries have plans for fiscal retrenchment, the US fiscal deficit is set to grow.

Japanese sovereign debt obviously also has risks attached - an ageing population and high debt/GDP ratio are not positives for the Japanese economy.  But these are not risks that are correlated with risks in the US and so diversification of foreign investments in this direction is also a sensible option.’

You can see the original piece in Chinese here.

EU-China Relations, Financial Crisis, International Relations, US-China Relations

China’s State Administration for Foreign Exchange (SAFE) has a difficult job.  They have to manage China’s massive reserves of foreign exchange - USD2.45bln at the last count and probably a few more billion when the figures for the second quarter of 2010 are released in the next few days.

SAFE is quite happy to tell the world how much FX reserves China has, but it is rather more cautious about revealing the details of where they are invested. 

A recent notice on SAFE’s website offers few details on where the reserves are stashed away, but it does provide some insight into SAFE’s thinking on the reasons for secrecy.  This is my translation of the main points:

‘The size of our foreign exchange reserves means that information about where they are invested could move global markets.  Publishing information about our transactions could lead to market turmoil. 

A higher degree of transparency could also negatively impact our ability to effectively implement our investment strategy.

The majority of countries are cautious in publication of data on their FX reserves, and do not publish information on specific transactions.  The IMF standards for data disemination in this area are not particularly stringent.’

The key point here is the second one.  If you are moving USD2.45trln in funds around, and you telegraph your movements to the market, anything you want to buy is suddenly going to get very expensive, and anything you want to sell very cheap. 

Secrecy about the composition of China’s FX reserves is partly realpolitic, but there is also a real financial logic behind SAFE’s determination to play their cards close to their chest.

You can see the full SAFE announcement in Chinese here.

International Relations, Monetary Policy, Statistics, US-China Relations

At the climate change talks in Copenhagen, discussions on the future of the global economy in the G20, and the framing of a response to increasing tensions between North and South Korea, observers have discerned a new approach to diplomacy from an increasingly confident China.

One of China’s leading thinkers on international relations is the Director of the Center for Chinese and Global Affairs at Peking University, Prof Pan Wei.  Last night, I attended a presentation he gave organised by a group called Young China Watchers, where he outlined some suggestions for thinking about international relations in the 21st Century.  This is my notes on his remarks:

‘International relations is concerned with 3 main areas:

1. Power - hard military and economic power and soft cultural power

2. Transitions between old and new powers

3. Geo-politics - strategic alliances between powers

In the 21st Century, thinking about these 3 areas  has to answer 6 new questions:

1. Why is global peace sustainable and war between great powers difficult to imagine?  Why is there now no great enemy like the Germany of the first half of the 20th Century or the USSR of the second?

2. Why is there now no grand system of global alliances?

3. Why is the USA, which accounts for 50% of global military spending, considered a power in decline, but China, with a relatively weak military, considered to be in the ascendant?

4. Why is it that in the 20th Century we only saw nations falling from the first world to the second (Argentina, Russia), but in the 21st we are seeing nations rising from the second world to the first?

5. Why is it so difficult to identify the central concern of international politics - with weapons of mass destruction, islamic fundamentalism, financial crisis, climate change, and the rise of China all competing for attention?

6. Why has no one developed a feasible grand strategy for responding to the challenges of the 21st Century?

Finding an answer to these questions demands thinking past the old theories of international relations.

One way to conceptualise the new world order is to think about different sets of issues - economic, religious, political, natural resources and so on.

For any given issue, nation states can be in conflict, cooperation, or competition.  And nation states can be compete, conflict, or cooperate on one issue, whilst at the same time having a different relationship on another issue.

There are three major implications of this analysis:

1. It is a time of peace - since the potential for cooperation or peaceful competition on some issues means conflict on other issues should not be allowed to spill over into militaty conflict

2. No scope for hegemony by a single world power - because of the mulitiplicity of issues and power assymetries in different issues: ‘it is not sustainable to destroy US$100 tents with US$10mln missiles’

3. There is no scope for grand strategies, and instead nation states need to carefully evaluate their position across different issues areas, recognise uncertainties, and be prepared to respond nimbly to changes in the situation.’

In response to questions from the audience:

Prof Pan was sceptical about the conclusions of the official report on the Cheonan incident - noting that the South Korean ship was an advanced anti-submarine ship so it seems unlikely that it could be sunk by a primitive North Korean submarine.  He thought that the decision by President’s Hu and Obama to not address the issue at their meeting on the sidelines of the G20 meeting was sensible, since there was no easy resolution.

He thought that as China’s engagement in the world increased, and its citizens found themselves in more far flung corners, the scope for Chinese engagement to protect their lives and interests increased, but he anticipated that China would attempt to resolve issues through diplomatic rather than military means.

On the outlook for foreign policy under the Xi Jinping and Li Keqiang generation of leaders, Prof Pan noted that the next generation are cautious and do not reveal what their policy stance is.  He thought they see themselves as better educated and more worldly than the generations of leaders that have come before, and keen to surpass their achievements.  The danger in this is that they will be overly bold. 

On Xi Jinping’s famous remarks in Mexico on foreign leaders that have nothing better to do than criticise China, he said that China’s leaders often made extravagent remarks at private events, that Xi Jinping was actually a rather mild mannered individual, and that this comment was not revelatory of a new assertiveness amongst the next generation of leaders.

Communist Party, International Relations

Although China’s exports to the EU and US have held up pretty well this year, all things considered, it’s clear that the fiscal consolidation just getting underway in these two big markets will make things tough going forward. New avenues to pursue export growth will have to be found, and these are likely to come increasingly from the emerging world. You can already see evidence from the trade numbers that exporters are making headway in penetrating new markets - exports to Brazil were up by an eye-popping 98% year on year in the first five months of 2010, and those to ASEAN markets by 46%.

All of which helps to explain why emerging nations like Brazil and India are beginning to join the US and EU in the interminable finger-pointing over the renminbi. India has also begun to use anti-dumping measures against China on a regular basis across a number of sectors. Is this a sign that a new front in China’s trade wars is opening up? I doubt it. India, Brazil and a few others (Mexico and Turkey spring to mind) have the mass market and the strategic global clout to get in China’s face on trade, but any other emerging nations that try throwing their weight around in this way are likely to receive a bruising reminder of Chinese-style trade diplomacy.

Take Argentina, which earlier this year imposed restrictions on imports of Chinese-made shoes, pipes and other products. China was not happy, and responded with quality control measures on soy bean oil imports that hit Argentine exports. Five months on it’s pretty clear who’s winning this argument: according to the China customs administration Chinese exports to Argentina were up by 75% year on year in January-May, while its imports from the country were down 42%. Given that few emerging markets will be willing to risk losing out on the Chinese bonanza like this, I think most will remain wary of trying to curb the Chinese import surge.

Incidentally, given the clarity of the Chinese trade numbers (regarded as some of the stronger data in China’s somewhat rickety statistical base) it is funny to see Xinhua running with the Argentinian data. These portray a far more harmonious picture, with both China’s exports to Argentina and Argentinian exports to China rising, by 39% and 19% respectively. Trade flows are also much higher than shown by the Chinese side’s data. Sadly in this case, given the background of events on the ground and the poor reputation the Argentinian government has for statistical truth-telling, I’d put more faith in the Chinese numbers.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit

China - Latin America relations, Guest contributor, International Relations, Statistics, Trade

I have an opinion piece in the South China Morning Post today on Beijing’s latest moves on the CNY and the implications for this weekend’s G20.

SCMP subscribers can read the piece here.

Everyone else can read it below:

US Might Miss an Open Goal on the Exchange Rate at G20 Summit

China’s hapless soccer team might not have qualified for the World Cup, but when it comes to playing the game of global politics, its leaders have shown considerably more finesse.  So whilst China’s soccer eleven are polishing their boots, China’s economics A-team is on the way to Toronto for the latest summit of the G20.  There has not been this many Chinese faces arriving in Canada since Hong Kong’s reunion with the mainland.

One week ago, it looked like the latest meeting of the world’s self appointed high council on all things financial crisis would be a festival of China bashing, with the exchange rate the main focus of attention. 

Back in April, when the US Treasury delayed publication of a critical report on China’s exchange rate regime, the unspoken trade off was that China would start the yuan appreciation ball rolling ahead of this week’s pow wow.  The attack dogs in the US Congress latched firmly onto that informal deadline, threatening that if there is no movement on the exchange rate by the G20, they will take matters into their own hands.  If China had not acted last weekend, the US would have been compelled to go on the offensive at Toronto. 

The European debt crisis has Brussels gazing at its own bureaucratic navel.  But with emerging markets like Brazil and India adding their voices to the paean of protest, and rumblings of discontent from East Asian neighbors, China looked set to find itself isolated at the international negotiating table.

By signaling the end of the yuan’s 22-month peg to the US dollar, China has done just enough to calm the storm.  In the few days that have followed the announcement, the yuan has been little moved.  A 0.2% appreciation against the dollar will hardly be enough to bring the competitive shine back to manufacturers in the US rust belt. 

But China has won itself the benefit of the doubt.  The same voices that were, last week, raised in protest, are now offering a cautious welcome for Beijing’s promise of increased flexibility.  The US Congress remains on the war path.  But China has given the Obama administration the fig leaf it needs to justify its softly softly approach to dealing with Beijing, and done just enough to ease tensions in relations with other emerging markets. 

Leaders in the US and elsewhere want China to translate its words into actions - they want real change not just a commitment to change.  But for now, Beijing has moved the exchange rate to where it wants to be - off the G20 negotiating table.

A careful examination of the fine print in Beijing’s announcement on exchange rate reform, however, suggests the US would be well advised not to allow the yuan to slide too far from view. 

China’s trade surplus might have come in at a tidy USD198bln in 2009, but that is still way down from almost USD300bln in the 2008.  Beijing has taken this as evidence that the trade account is coming close to balance of its own accord, and the need for further adjustment of the exchange rate is limited.  The announcement also makes clear that what adjustment there is will be gradual, to give the export factories of the Pearl and Yangtze river deltas time to adapt.  When it comes to exchange rate reform ‘limited’ and ‘gradual’ are not the words that Washington DC wants to hear. 

Even more alarming for the US, China has made it clear that in the future, the direction of travel for the yuan against any particular currency could be down as well as up.  The new plan for the yuan might mean continued stability, or even depreciation, against the dollar, at the same time as the currency appreciates against the euro, the Brazilian Real or the Indian Rupee. 

If Brussels, Brasilia, and New Delhi find the yuan’s new flexibility means appreciation against their own currencies, they will see little reason to support the US on the need for appreciation against the dollar.  By conceding to US demands for enhanced flexibility of the exchange rate, China might have succeeded in turning the international consensus on the need for yuan appreciation on its head.  If it is the US that finds itself isolated at the negotiating table at the next G20, scheduled for Korea in November, they might regret missing an open goal in Canada.

Exchange rate, Financial Crisis, International Relations, Trade, US-China Relations

China and US leaders are about to kick off this year’s meeting of the Strategic & Economic Dialogue with opening remarks.  I have an op ed on the talks in today’s South China Morning Post.

SCMP subscribers can read the article here, or I’ve pasted it below:

Don’t Mention the Currency

A sunk ship in South Korea and a sinking economy in Greece may be enough to scupper hopes of movement on the exchange rate at the US China Strategic & Economic Dialogue

China is a currency manipulator and unless they change their wicked ways we will take them to task: that was the message from Senator Barack Obama on the 2008 Presidential campaign trail.  Back then, the exchange rate was 6.83 yuan to the dollar.  Almost two years and one global financial crisis later, the exchange rate is still 6.83 yuan to the dollar, and President Barack Obama and his team have fallen strangely silent.

One reason for that silence might be that an informal understanding between Beijing and Washington has been reached.  Back in April, the US Treasury decided to delay publication of a report to Congress on international exchange rates - a report which might have officially designated China as a currency manipulator.  That decision came shortly after a visit to the US capital of one Zhong Shan, China’s vice Commerce Minister.  Whispers from Washington suggest that, though no concrete assurances were given, Zhong’s visit did at least result in a meeting of minds.  The US would dial down the rhetoric on the exchange rate and China would proceed with appreciation, at its own pace, but within a reasonable time frame.

For many in Washington, a reasonable time frame meant before the next meeting of the Strategic & Economic Dialogue - the annual US China talk fest which is set to take place in Beijing on the 24th and 25th May.  But with the talks about to commence, expectations of an early resumption of appreciation appear increasingly misplaced. 

Why the delay? Look no further than the European sovereign debt crisis.  The EU might have belatedly mounted its white horse to ride to the rescue of the Greek damsel in distress.  But the episode has rung alarm bells in Beijing, suggesting that the global financial crisis has yet to run its course and the time for the resumption of yuan appreciation is not yet right.

If a resumption of appreciation in advance of the meeting was too much to hope for, maybe a little table thumping in the meeting itself will do the trick? 

Probably not.  On the US side it is the State Department that’s calling the shots, and that means a focus on the strategic, not the economic, half of the Dialogue.  The sinking of a South Korean navy ship, with the deaths of 46 sailors on board, has raised the temperature on North Korea.  With an official investigation placing the blame squarely at the door of Pyongyang, shaping a response has risen to the top of the agenda for the Dialogue.  And with the focus of attention elsewhere, there is little hope of progress on the exchange rate.  Officials on both sides have already begun to talk the issue down.

A sinking economy in Greece and a sunk ship in South Korea might be enough to scupper hopes of a move on the exchange rate at this week’s Dialogue.  But excuses will do little to appease an increasingly vocal domestic lobby in the US.  Trade unions, industrial interests, and a Congress spoiling for a fight might have bought into the Treasury’s softly softly approach in the run up to the Dialogue.  But continued inaction may well use up scarce supplies of patience. 

The Treasury has signaled that it wants to see a multilateral solution to the problem - hinting at a resumption of appreciation ahead of the meeting of the G20 in Canada in June.  But if no action is forthcoming by then, domestic interest groups might start to ask what President Obama has done to make good on his campaign trail promises.

EU-China Relations, Exchange rate, Financial Crisis, International Relations, US-China Relations

I have an op ed in today’s South China Morning Post on the impact of the latest trade data and the European sovereign debt crisis on the outlook for China’s exchange rate.

SCMP readers can see the text here.  Or I’ve pasted it below:

Even the tea leaves some questions unanswered
 
 
When will Beijing loose its iron grip on the value of the yuan and allow its appreciation to resume? No one has a definitive answer to that question. But, until quite recently, the signs in the tea leaves suggested a resumption of appreciation was imminent and that a first move might even be on the agenda for this month or next.
Why so confident? Three factors seemed to suggest Beijing was gearing up for a policy shift. First, China’s exports are moving back onto an even keel. The factories of the Pearl and Yangtze river deltas are shifting up to full capacity, and exports for March and April have returned to pre-crisis levels.
 
Second, inflation has returned to the mainland’s economy. Increases in consumer prices might be contained but prices at the factory gate are way up, and one of the main reasons is higher costs for imported crude oil and iron ore. The appreciation of the yuan would help keep a lid on imported price rises.
Third, China’s trade partners are ratcheting up the pressure. A meeting of the US-China strategic and economic dialogue at the end of this month and a G20 summit at the end of next month will increase the volume of calls for appreciation. Beijing faces its own domestic pressures and nationalist sentiment might make it difficult to kowtow to the United States. But with the European Union and other emerging market economies like Brazil and India also calling for appreciation, China’s leaders might find themselves with few friends and many enemies round the G20 table.

The signs in the trade, inflation and political tea leaves seemed to point towards an imminent resumption of appreciation. But a vanishing trade surplus in March and April and the European sovereign debt crisis have thrown the tea leaves into a new configuration.
Central to the case for China’s trade partners is the idea that the appreciation of the yuan will help bring China’s trade account, and so also the world economy, back into balance. An undervalued yuan, the argument goes, gives China’s exporters an unfair advantage and cripples the competitiveness of exporters in the EU and US. The result is bumper trade surpluses in China and corresponding deficits elsewhere in the world.
But a deficit in China’s trade account in March and a tiny surplus in April have called this argument into question. If China’s trade account is moving back into balance at the current exchange rate, what is the urgency in resuming the yuan’s stalled appreciation?
The European sovereign debt crisis has also changed the calculation. For China’s leaders, the Greek drama signals that the international outlook remains uncertain. If the path to recovery is rockier than was previously thought or, even worse, might lead off another cliff, that is bad news for China’s exporters.
The EU seems to have moved decisively, if belatedly, to restore confidence and stability. But with the outlook uncertain, China’s leaders are hardly likely to kick away the main support for the most important sector of the economy.
The Greek crisis also affects the way the European side views the exchange rate. A silver lining to the Greek cloud has been a fall in the value of the euro against the yuan - strengthening the competitiveness of European exporters. With plenty to worry about at home and the exchange rate moving in their favour in any case, Brussels is likely to dial down the volume of complaints on China’s exchange rate regime.
All this changes the calculation on China’s exchange rate regime. The signs in the tea leaves are no longer as clear as they were. If the Greek drama develops into a European tragedy, or China’s trade account stays close to balance this month, it might even be time to brew a fresh pot.

EU-China Relations, Exchange rate, International Relations, Monetary Policy, Trade, US-China Relations

Following on from my earlier post on Currency Wars 2, this is my translation of the next few pages of the introduction, where Song Hongbing introduces the 18 international banking families he believes are pulling the strings of global finance, and directing the course of world history:

‘The Rothschilds - the ‘godfathers’ of international finance, whose influence spans 200 years

The trusted advisor of Germany’s Iron Chancellor Bismark - Bleichroder

From Cologne in Germany the Oppenheim family

From Hamburg in Germany the Warburg family

Originally from Bavaria in Germany but finding success on Wall Street, the Selingman family

Originally from Frankfurt, but making it big in the USA, the Schiff family

The Schroder family, originally from Hamburg but finding success in London and New York

The Speyer family, originally from Frankfurt

The Mendelsohns from Berlin

The Baring family from England, who were associated with the Rothschilds in the 19th Century

The Hope family from Amsterdam

Advisors to the French royal family, the Fould family

The Mallet and Pereire families, also from France

From Switzerland, the Mirabauds

Finally, the Rockefeller and Morgan families from the USA.

The international banking families are the most powerful group on the international scene.  Their thinking, to a great extent, determines the fate of mankind.  Wherever they go, that place prospers, wherever they leave, that place declines and falls.

With a motion of their hand, they can instigate a period of great creativity and productivity.  With another motion they can seize the resulting riches for themselves.

For the last 200 years, these families have strutted on the world stage, their position unassailable, their influence on the course of Western history impossible to underestimate.  As times change, the star of some families has plummeted from the sky, but the majority retain their power and influence today.

The world is always changing, but the essentials of human nature do not change.  For thousands of years, the thought of wealth has aroused in man feelings of greed and horror, the thought of power feelings of desire and resentment.  Whether it’s the games of political chess that have characterised thousands of years of Chinese history, or the financial machinations of Western history, the same mark of human nature is evident. 

China is no stranger to the history of mans grasping after power, but regarding mans grasping after wealth, we still have a lot to learn.  Let’s start the learning process by examining the lives of the world’s most powerful banking families.’

You can see why the Currency Wars books are so popular.  They combine a romantic insight into an interesting period of Western history, with a plausible explanation of the way the world economy works, and wrap the whole thing up as a lesson for Chinese people on how they can avoid being cheated by the evil global financiers.  Song Hongbing satisifies curiosity about Western history and the global financial system, at the same time as playing to the nationalist peanut gallery.

Banking, Culture, International Relations, US-China Relations

Song Hongbing, the author of Currency Wars, is not a man to rest on his laurels.  With one best seller under their belts, many authors would have taken a well earned rest.  But Song has been hitting the library, and, as a result, his new book has already hit the shelves.  Imaginatively entitled ‘Currency Wars 2′ the book develops Song’s theory that the Western world is run by a shadowy cabal of banking families, led by the Rothschilds.  This is my translation of the opening pages:

‘Who are the international banking families?

Take the Rothschild family as representative of the 17 main international banking families.  Beginning in Holland, England, France and Germany, they slowly spread their influence to Austria, Italy and the USA, finally ending in our own time with a financial network that spans the Western world.  In the 19th Century, as Europe reeled from the shocks of a capitalist revolution in France and an industrial revolution that swept across the entire continent, the balance between the great powers was disturbed, leading to the outbreak of war.  The international banking families shrewdly seized this historical opportunity, using the financial system to provide capital to expanding industry and to warring nations.  At the same time as these families amassed great wealth, they revealed their enormous influence in world affairs.

The power of wealth is expressed in the corruption of power, in the thirst for power, and in the desire for influence.  In the market for capital, the international banking families gradually exerted control over the channels through which capital and credit flows, till the entire game was played according to their rules.  From the monopoly rights given to the Bank of France by Napoleon to the financing of the Louisiana purchase.  From the hyper inflation of the 1920s to the rise of Hitler.  From the emergence of the US dollar as the global reserve currency to the financial crisis of 2008.  In all of these events, indistinctly, in the background, is visible the shadowy outlines of these international banking families, and their control of the channels of capital and credit.

The international banking families have humble origins, working through connections with people in positions of power they gradually established their economic strength, grasping control of the channels of distribution of capital, exerting control over commerce and industry, and from there beginning to influence government policy to favour their interests.  They use enticements that are difficult to turn down to influence everything from the direction of economic policy, to the appointments and promotions of military officers, from shaping the agenda for public policy, to controlling what information is available to the public.  Over 200 years of experience, the international banking families have matured.  In the past they wielded influence, now they exert control.  They are the power behind the scenes in Western society, riding roughshod over laws, governments, and rights, completing the metamorphosis from the possession of wealth to the wielding of power.’

I translated a part of the first Currency Wars in an earlier post (Currency Wars Translated), and it doesn’t seem that Song has moved very far from his original thesis.

I’ll try and come back and translate a little more of the first chapter in the future.

Banking, Culture, International Relations

I have an article in today’s South China Morning Post on where China is investing its USD2.4trln in FX reserves.

SCMP subscribers can read the article here and I’ve also pasted it below.

The USD2.4trln mystery

Where exactly is China investing its US$2.4 trillion in foreign exchange reserves? Most economists agree that a substantial chunk, and perhaps the majority, of those reserves are invested in US Treasuries - debt issued by the US government to finance its spending.

Until quite recently, monthly data published by the US Treasury supported that thesis. The Treasury International Capital System (TIC) - a massive data collection effort by the bean counters in Washington - showed a steady increase in China’s holdings of US Treasuries. Holdings did not increase by as much as the increase in China’s foreign exchange reserves, but they did grow steadily enough to confirm that China’s State Administration of Foreign Exchange remained the US Treasury’s best customer.

But, in the second quarter of last year, that relationship started to break down. China’s foreign exchange reserves continued to grow at a rapid pace, but the Treasury data picked up little if any increase in China’s holdings of US Treasuries.

Data from the People’s Bank of China shows that between April and December last year, China added a whopping US$441 billion to its foreign exchange reserves. But according to purchases picked up by the monthly TIC data over the same period, China’s total holdings of US Treasuries fell by US$12 billion.

That discrepancy flies in the face of common sense. China has continued to run a substantial trade surplus with the US. If Beijing’s foreign exchange managers were not reinvesting that surplus in US dollars, the brutal logic of supply and demand in international currency markets would force the yuan to appreciate against the dollar. But it has not, suggesting that China continues to park its reserves in US dollar debt.

Enter the Treasury’s annual survey of foreign holdings of US securities, which pieces together who is really buying US Treasuries. The results of the latest survey show China’s purchases of US Treasuries continued unabated. The results propel China back into first place as the biggest holder of US Treasury debt, with US$894 billion.

What the annual survey captures, that the monthly data misses, is a bias in the monthly data that attributes Treasury purchases to the place they are purchased, not the country of ownership.

Beijing’s foreign exchange managers appear to be taking advantage of flaws in the system to hide their purchases - deliberately channelling purchases through London and other centres to hide the increase in their holdings.

The motivation is probably partly domestic public opinion, which is decidedly averse to financing the profligate US government. At the same time, signalling intentions to the markets makes little sense.

For Beijing, hiding its purchases of US Treasuries plays to the nationalist gallery by hiding the fact that China continues to fork out its cash to finance the US deficit. And it keeps the financial markets guessing on where China is investing its money. If that means the rest of us also stay in the dark, that’s just too bad.

Exchange rate, International Relations, Monetary Policy, US-China Relations