A number of sources are reporting that the Chinese have been loading up on JGBs despite their relatively low yields. Is this a flight to quality by the Chinese central bank? Andy Lees of UBS shows that the magnitude of the purchases is extremely large relative to historical patterns:
China has bought USD6bn of JGB’s between January and April, double the previous record for the whole of 2005. Analysts quoted on Reuters say it is likely the result of concerns over Europe and is not a change in strategy, but with the growing importance of trade between the two regions, and a long term political need to build closer ties, I wonder whether this is more than just a short term parking of money. Remember the Japanese government has implemented policy that effectively ensures more domestic savings will buy JGB’s as it gets nervous about deficit funding.
Financial Times Deutschland also talks about this purchase. They say that it is the newspaper Nikkei which is the ultimate source of their information. According to FTD, given doubts about both the euro and the US dollar, emerging market central banks are looking to alternatives for reserve holdings. Precious metals and commodities are two such alternatives. However, we can now add JGBs to the mix. FTD says the Chinese are concentrating on the short end of the curve, where I might add the yield discrepancy is minimal given low rates in the US and Europe.
Is this a trend? Barclays Capital says no – that it is to early to make that call. But given the sums we are talking about, something is clearly happening at the Chinese central bank.
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