Those who believe the Chinese government is in the midst of a Treasury selloff may want to look a little deeper, according to research from Societe Generale analyst Rudy Narvas.
Narvas explains that while China may appear to have reduced its holdings of treasuries in March, it’s actually just routing its trades through London, and is continuing to buy.
The breakdown of TIC data shows that the foreign private accounts increased their net purchases of Treasuries by $19.5bn, while foreign official purchases have scaled back their activities, as net flows fell to $6.8bn from $15.9bn. However, this data may be misleading. The chart on the right (BELOW) shows the change in foreign holdings of US Treasuries by country and we can see that Chinese holdings fell by almost $10bn, at the same time UK holdings rose by about $30bn. Other data and anecdotal evidence suggest that China has been routing its trades through London and selling Treasuries in the US session. On a levels basis, in June 2010, holdings of Treasuries in the UK rose by $230bn to $325bn. On a flows basis, June 2010 net flows for the UK fell by a whopping $250bn which was matched by net flows for China which increased $244bn. The change in flows was due to annual benchmark revisions which suggest that trades are being routed through the UK.
As such, Narvas suggests that official buyers, specifically countries, will not be able to stop their buying activities. Instead, if you’re looking for a source of pressure on the U.S. government to take action on the deficit, Narvas recommends private buyers.
So while China may appear to be slowing, it’s actually just buying through a different window:
Photo: Societe Generale
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