China cuts Treasury holding to fund foreign deals

By Wei Gu
August 20, 2009

wei-gu.jpg– Wei Gu is a Reuters columnist. The opinions expressed are her own —

Please don’t call it a liquidity crunch, but it rather looks as though China might have had to sell a sliver of its vast hoard of U.S. Treasury paper to fund its private sector’s big overseas foray.

China’s holding passed $800 billion in May, sparking speculation that it could reach $1 trillion within a year, but the net June figure, published on Monday, showed a 3.1 percent drop to $776.4 billion, the biggest percentage fall in nearly nine years.

It’s clear that China has been keen to use more of its reserves to secure strategic resources supply overseas, as well as diversifying them into emerging markets such as Africa to help create demand for Chinese exports. The unwinding of global imbalances also means China might have fewer dollars to invest, as its July trade surplus more than halved from a year earlier.

In the past, almost all outflows from China come from the government, which by default put the money into U.S. Treasuries. But now the private sector needs more foreign currency.

Just this month, China’s Yanzhou Coal Mining agreed to buy Australian coal miner Felix Resources for $2.9 billion, and Sinochem Corp. spent $878 million buying British oil and gas explorer Emerald Energy.

The government itself also seems to be getting more adventurous. Its $200 billion sovereign fund finished 2008 with almost 90 percent of its assets in cash, but is determined to put more money to work this year.

This week Reuters reported that the fund will soon invest up to $2 billion in U.S. mortgages as it eyes a property market rebound, and last week Reuters revealed the fund’s talks on a $1 billion-plus convertible bond investment in Fortescue Metals Group.

Not all the June sales of U.S. Treasuries were turned into cash. Half the sales of $51.8 billion short-dated debt were rotated into longer-dated maturities, indicating that Beijing now cares more about yield and worries less about the safety of its investment, reversing an earlier trend of reducing the average life of the holdings.

These monthly reports do not tell the whole story, because they exclude trades through London intermediaries. The more accurate numbers are not revealed until February, in the annual survey. Even so, China appears keen to diversify away from U.S. Treasuries, and as the authorities allow more private sector investors access to dollars, this process will accelerate.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

7 comments

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China is not raising cash so it can fund purchases. China is making purchases so it can get rid of some of its dollars. Can you blame them? We have run our economy into the ground with profligate, debt-financed spending and increased our deficit to unimaginable levels. We are well on our way to destroying the dollar. China would rather trade dollars for commodities, even if it has to stockpile commodities. As I recall, the long bonds China is buying are TIPs (inflation protected Treasuries), so I don’t think they are looking to take on that much more risk.

Posted by Chas | Report as abusive

Who wants to buy US Treasuries when they are not worth the paper it is written on long term? The US is printing money to solve all its debt problems. Like the adage goes, if you owe your bank $1million, you are in trouble; if you owe your bank $1trillion, then the bank is in trouble.

Posted by mapelleaf3 | Report as abusive

The powers-that-be managed to knock Chinese stocks down right before they went after American ones last week. It does you no good to realize it’s manipulation when most people don’t. Think about it we’re investing here under our banking system and they can still scare us about Chinas. I wonder who and how much they make by doing this. At any rate China is positioning itself to not take the shafting others hope to hand it when the worlds economy kicks in again. I’m banking on the fact that RTP and BHP has bitten the hand that feeds them real good. How much ore can Fortesque sell them now is determined only by how much it gets out of the ground recession or not.

Posted by Bob | Report as abusive

China may be thinking to create some cartels of international influence in commodity / natural resources world market; China may think of convirting itself into market economy after this exercise to safeguard itself from the ill effects of its currency appreciation.

Posted by CA. Rajay Kumar Aggarwal | Report as abusive

China has been doing more good in Africa lately building roads and so on than the Americans have in the last hunred years only coming in Black helicopters.

America has lost his moral compass with only money being the magnetic field. They doomed the dollar themselves by playing a high risk poker game and crazy spending in the year to September 30 a amzing total of $3.653 trillion! U.S. Rescue May Reach $23.7 trillion, Barofsky Says.

Obama increased defense spending and the 2010 fiscal year budget calls for $527 billion in defense spending without even counting in the costs of the Iraq and Afghanistan war which will be another couple of trillions.

The craziness has to end somewhere especially now China is funding it’s own encirclement cynically enough.

Posted by Youri Carma | Report as abusive

the american bankers have had this plan in play for a long time. We broke Russia’s back by playing “who has the bigger bank account”. Now, brilliantly, we’ve broken China. They supplied us with all the toys for their cheap slave labor, now we’ve left them holding a bunch of worthless paper! fools. The world will be going to a one world currency, probably digital, an ID card, and China will be left holding crap in one hand and a wish in the other.

I’d be pretty mad if I were China right about now.

Posted by doug | Report as abusive

Another reason? China in order to run a huge surplus with the US is required to leave a certain amount of the money here. It’s trade surplus is now down so it can move it out. This doesn’t mean it didn’t want to all along.

Posted by Phubaiguy | Report as abusive