China Just Can't Quit The Dollar

chinesemilitary tbi

From time to time, China likes to talk about a post-dollar world or how they’re concerned about the US’ ability to pay it back. But they’re not doing too much to put their money where their mouth is.

As the FT puts it, China is stuck in a dollar trap, at least for now:

In March alone, China’s direct holdings of US Treasury securities rose $23.7bn to reach a new record of $768bn, according to preliminary US data, allowing China to retain its title as the biggest creditor of the US government.

“Because of the sheer size of its reserves Safe [China’s State Administration of Foreign Exchange] will immediately disrupt any other market it tries to shift into in a big way and could also collapse the value of its existing reserves if it sold too many dollars,” said a western official, who spoke on condition of anonymity.

Brad Setser has more, noting that the only real change is that China is buying heavily on the short side of the curve:

Clearly, though, something has changed.

And I suspect the main change is that almost all the dollars that central banks are buying are getting channeled into shorter-term Treasury bills, not longer-term notes. That is quite different than in the past. In 2003 and 2004 — and again in 2007 and early 2008 — a spike in central bank intervention would lead to a rise in central bank demand for longer-term bonds.

As the yields on longer-term Treasuries rise, though, the opportunity cost — or at least the foregone interest income — of staying in bills rises … at some point, I would guess that some reserve managers will need a bit of income, and become convinced that yields on longer-dated Treasuries have risen by as much as they are going to rise. Read the whole thing >

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