Monetary Policy

Deadbeat Nation Watch: China Dumps More Than $30 Billion in U.S. Funny Money

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You won't have the Chinese to kick around anymore for holding so much U.S. government debt. After a record-setting reduction in its Treasury securities position, China is no longer Uncle Sam's largest foreign creditor. You'll just have to kick it old school with straight-outta-the-eighties Japan bashing.

Next Fed Open Market Committee meeting will be held at Marshalsea.

According to Treasury Department data, China, Russia, France and Germany all substantially reduced their positions in Treasuries in December 2009. From ABC's Matthew Jaffe:

According to new data released Tuesday morning by the Treasury Department, foreign holdings of Treasury securities plunged by $53 billion in December, a record drop. China led the sell-off, reducing its holdings by $34 billion. Japan, meanwhile, increased its holdings by $11 billion to become the new largest foreign holder of Treasuries. As of the end of December, Japan held $768 billion of US government debt, followed by China at $755 billion, and then Great Britain at $302 billion, after increasing its holdings by $25 billion during the course of the month.

In the last year there have been consistent concerns that China and other nations might reduce their holdings of US government debt as the US continues to rack up record deficits in the wake of the recession. If foreigners were to undertake a massive unloading of US Treasuries, the country could have to make higher interest payments.

From your mouth to God's ear, Matt! But the Treasury's foreign-held debt figures tell a slightly less dramatic tale. Total foreign-held debt increased in December, and since December 2008, other countries have added nearly $600 billion in Treasuries to their debt portfolios.

Why do they hate us? Or does this mean they love us?

Clearly, it would be a very helpful step for international markets to lose their taste for U.S. government debt, and concerns about the solvency of Washington are real. But so far, this dog's other shoe still hasn't boiled. Treasury note yields continue to stay low. Regulars in the Reason threads will be familiar with ace commenter RC Dean's speculations that the U.S. government is quietly buying up its own bonds to cover up for a drop in demand. But for reasons that escape me (maybe they just haven't visited this country in a while), foreigners still seem to be willing to flush money down the American Standard loo.

NEXT: Climate Crackup

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  1. Its not entirely clear what’s up with the China numbers. For some reason, I understand Hong Kong has its own book of US Treasuries, and they are up by about as much as China’s are down.

    Still, there’s no question China is ramping down its dollar holdings on all fronts, probably as fast as it prudently can, and mostly, it appears, in exchange for hard assets.

    1. Yes, from what I’ve heard, that’s been one of the primary drivers in the commodities boom. China trading USD for copper, oil and gold etc.

      1. China probably listens to too much AM talk-radio.

    2. The Hong Kong Monetary Authority has always made large purchases of US Treasuries basically for the same reason that Mainland China does: the HK$ is pegged to the US$ and they buy and sell Treasuries to maintain the peg within the band (they main banks in Hong Kong that are authorized to print money informally play a part in this process also, so take a look at purchases or sales by HSBC, Standard Charter, Hang Seng)

    3. There isn’t much evidence of China buying gold for reserves (although India is openly doing it in the billions whenever gold dips). China was making heavy purchase of copper in 2008 but that was after prices collapsed in the span of two months (although they have since recovered they are still below their 5 year high), and I suspect oil price volatility has had more to do with hedge fund manipulation of the market rather than China purchases – oil reserve supplies and spot prices have had a low correlation in the last two years. The Chinese ARE deploying money to buy resource producers (such as their famous attempted purchase of Rio Tinto).

      But it is the standard story line.

      1. I’m not sure what the retail gold purchases in China might be. They do have a good chunk of gold production, though.

        The Chinese central bank isn’t going to openly buy gold on the open market, as that would push up the price they would have to pay. They’ve known the IMF was going to sell a big chunk, and were probably angling for the lot that India bought.

        I got $20 that says the Chinese buy all or most of this lot from the IMF.

  2. Actually, Matt said that China reduced its holdings by $34 billion, not “more than $50 billion.” And, as Tim goes on to note, it doesn’t seem to mean anything anyway. But, hey, it’s almost quitting time.

      1. Actually, China is likely still the largest creditor of the US. While its true that due to recent marginal changes in direct Treasury obligations holdings, China is behind Japan (so to speak). However, what is very rarely discussed is that China holds a bit over $400 Billion (yes, with a “B”) in Fannie and Freddie backed MBSs. On December 31, 2009, the Treasury lifted the limit on the dollar amount of those securities that it would backstop, effectively putting the full faith and credit of the US government behind each of those securities. So there is really no effective difference (from an accounting perspective) between the MBSs and T-Notes. So China’s real holdings of US government securities or fully back securities is over $1T.

      2. Why you people continue to treat Vanneman with respect is endlessly mystifying.

        1. I have no idea either. You can see clearly from the story the that total reduction was over 50 billion of which over 30 billion was from the Chinese. The original headline simply attributed the full “over 50 billion” to the Chinese. It’s a pretty minor error that a polite email or comment could have corrected. Instead he pulls his typical drop in for a dickish comment and leave. He’s basically a low-quality (i.e. not even amusing or clever) troll.

  3. If you look at the Federal Reserve Bank balance sheet, you can see where the funny money has gone. In one year, the Federal Reserve increased its outright holding of Treasury securities with $1.4 trillion dollars: FEDERAL RESERVE statistical release.

  4. Goodbye low interest rates; you sure were wonderful while you lasted.

    1. I got my fixed! Hah!

  5. Who is buying up the debt then? Is it us? Or the Freemasons?

    1. The Illuminati.

    2. The Federal Reserve, I think

      1. Oh, come on. They’re a myth.

        1. Yes they are

  6. As of the end of December, Japan held $768 billion of US government debt, followed by China at $755 billion, and then Great Britain at $302 billion, after increasing its holdings by $25 billion during the course of the month.

    Oh, man! And here I spent all this money on Rosetta Stone to learn Chinese! Now I will have to GO BACK to learning Japanese as Larry “The Liquidator” told me back in the 90s.

    Shit.

    1. Awesome. I took Japanese in college. I can say useful things like hello, my name is _____, cat, thank you, and big tits.

      1. Re: Pro LIbertate,

        […] and big tits [in Japanese]

        Can you even put those two words together in Japanese??

        1. That’s racist!

        2. Oki opai. And hai, so desu.

        3. Can you even put those two words together in Japanese??

          NSFW

          http://www.babe-envy.com/pb/hiromi-oshima.html

        4. You can use “big tits” in Japanese, you just rarely have occasion to.

          Plus, the actual Japanese call them “cow breasts”.

          1. Interestingly, some people in Mexico colloquially call big-breasted women: “Swiss Cows.”

            Don’t ask me why.

          2. The Chinese slang for boobs is “balls” or “bo” (as in basketballs – maybe their referring to “Spaldings” rather than the basket or volley variety)

        5. Someone hasn’t been following the Hello Titty porn series.

    2. Chinese is easier than Japanese. Everything in Japan was invented in China, anyway.

      1. thats not true

  7. Lets see, you can hold:

    1) US Treasuries while the US government spends the dollar into irrelevance.
    2) Euros and watch the European Union come apart at the seams.
    3) Yen, while Japan eases into senility.
    4) Rupees, backed by the legendary stability of the Indian government.
    5) Chinese securities, supported by the complete trustworthiness of the Communist Chinese government.

    Somehow, this makes me feel as secure as Beaker during a fire at Honeydew Labs.

    1. You forgot about gold, that’s still accepted anywhere.

      Or if you must have paper, I suggest AUD, or maybe CAD.

      1. Gold and Silver.

        And if paper, Swiss Francs. If you must.

        I keep in my safety box some gold and silver bullion (just a tad, I am not rich), Federal Reserve Notes (just in case I need some quick cash), ID papers, a gun, ammo, a survivalist’s handbook, some really old photos, and a road map.

        I used to have stocks, but I sold them thinking that once the US becomes another Uganda, they will be pretty worthless… I may buy some ETFs in commodities, later.

        [Yes, the Idi Amin reference was on purpose…]

        1. OldMex,
          Is that gold and silver coin or bar? The feds can still confiscate bars. Coins are protected for the time being because of their numismatistical purposes. I don’t actually think that is a word.

          I keep coin myself.

          1. The feds can “confiscate” bars under that idiot law the same way they do anything else that violates the Constitution: illegally.

            If it comes to it in some sort of emergency, well…

      2. CAD … AUD has already had its run.

      3. Also maybe Swiss Francs or possibly even some Swedish Krona?

    2. So true.
      I remember a discussion I heard on CNBC a few months ago about what would happen if treasuries were downgraded to AA from AAA. The response was AA would then become the new AAA.

      Yes we are financial train wreck but all said on done we are one of the better train wrecks out there.

    3. Indian people buy gold jewelry; Chinese people hoard silver trade dollars and Qing dynasty small ingots. Best of all: learn to grow and store your own food, and to make friends with your neighbors.

  8. Just this morning I was thinking that we’re really overdue for a visit from a benign super-race of aliens.

    With valuable bonds to sell.

    1. Sorry, Earthling.

      We do not understand your concept of “buying debt”.

      1. What’s “debt”?

        1. Domtar and Frugul get back to work pumping my gas.

          1. Dey tuk ar jerbs!

  9. Well, fine. Teach us your space economy ways, please.

    1. “Neither a borrower nor a lender be.”

      -Shakespeare, translated from the original Klingon.

    2. Our Space Economy works (not that I expect your puny brain to understand) by way of exchange of private property. That’s it. I expect you to have many questions.

      1. First question:

        Are these exchanges voluntary? [eyes Frugul’s anti-matter pistol warily]

      2. Second question:

        Got anything to sell besides those ugly beads?

        1. Hey, I just sold Florida for some of those beads.

      3. I expect you to have many questions.

        I have one. Do you like your job? If so then why aren’t you cleaning my windshield?

        Check the reactor coolant levels while you are at it.

  10. Good news, keep dumping billion more until we had it all back.
    lets see you have hilly to thank for the Reds dumping funny money like the U.S Dollar. it will be good for us all in the long run.

    Read Aresen above.

  11. The Financial Times of London recently reported that Russia’s central bank is diversying its foreign exchange holdings by buying Canadian dollars.

    Most of its holdings are in US dollars & Euros – two currencies with obvious problems. The Russians started buying Canadian dollars before the Greek fiasco became public.

    1. I would prefer that the CAD remain a nice, obscure little currency that people laugh at for the funny colors.

      Being a reserve currency makes the issuing countries’ politicians think they have superior intelligence.

      Take it from me, our politicians are just as effing dumb as those of any other country, eh?

  12. Geithner is buying up that debt and retiring it.

    Woohoo!

  13. Yeah buddy, can you blame him? I mean really.

    Jess
    http://www.privacy-tools.de.tc

  14. But for reasons that escape me (maybe they just haven’t visited this country in a while), foreigners still seem to be willing to flush money down the American Standard loo.

    What else are they going to buy?

    $765 billion of gold at current prices is about 1/8th of all the gold extracted from the Earth in all human history. It is neither economically nor physically practical for the Chinese to buy that much gold, especially since a huge percentage of that gold is already in the vaults of national banks and treasuries.

    That leaves, what? Euros? The Eurozone isn’t in any better shape than the U.S. Yen? Japan’s debt-to-GDP ratio is worse than Italy’s. And outside the U.S., Eurozone, and Japan, there just isn’t enough sovereign debt in developed countries to possibly absorb even the Chinese demand.

    However questionable US Treasuries might be, they’ll sell until something better comes along.

    1. Even if there was an alternate currency with deep enough liquidity to absorb their dollar reserves, they still couldn’t get away from the dollar. They hold so many dollar denominated securities in the form of T-Notes and MBSs that if the market ever thought they were truly serious about unloading them in a real way (everyone knows the recent marginal changes are basically optics), that everyone would rush for the door and the orderly decline in the dollar would quickly become a meltdown. This is a problem for China in two ways: (i) assets that largely trade in dollars (such as oil, gold and natural resources) would become multiples more expensive in dollar terms than they are now very quickly – rendering China’s approximately 1 trillion in dollar denominated securities worthless and (ii) would cause China to have to seriously expand its money supply to keep the US$/RMB exchange rate stable – something they cannot risk doing given the out of control bank lending at the behest of provincial governments that has created a huge bubble in stock and real estate prices over the last 18 months.

      Nothing better is coming along.

      1. Yep, it’s a tight little box. There’s nowhere to go, and even if there were, the Chinese couldn’t go there.

        This is also why I’ve rolled my eyes at every “We have to be nice to the Chinese or they’ll stop buying our debt” claim I’ve seen. What are they going to do instead?

        Sure, China could switch all new purchases all to Euro-denominated bonds. What would happen is Eurozone bonds will then become more expensive relative to risk-adjusted return, US bonds will become cheaper, other debt-buyers will swap from Eurozone bonds to Treasuries, and the equilibrium will resume.

        Except it would happen even faster than that. The Chinese would have to buy Euros with their export-earned dollars in order to buy the Euro-denominated bonds. Which means whoever sells the Chinese the Euros would be flush with dollars to buy Treasuries.

      2. The Chinese are tip-toeing out of the dollar trap as fast as they can.

        They have, in fact been reducing, at a pretty good clip, their purchases of US debt.

        They have also been setting up bilateral agreements with trading partners in their own currency.

        Its a big problem for them, so it will take time, but I have little doubt that in ten years, if not sooner, no one will be talking about how the Chinese are in a dollar trap.

        That said, for now at least, the dollar is still seen as the best of a bad lot of currencies.

  15. What do we look like to you, Mrs. 0bama? From now on, you must DO SEX TO YOURSELF!!!

  16. Actually the largest creditor of the US Government is the US Government. In the form of the Social Security Trust Fund.

    As of last December, we owed it $2.5 trillion.

    1. QFT. But the Fed is also the largest holder or Treasuries and Treasury guaranteed securities – so right on all accounts.

      1. But the Fed is an independent entity!

        Right?

  17. Ah yes… and thank you Ronald Wilson Reagan (count the letters). The anti-Christ is dead. Long live his progeny!

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