By Zhang Huanyu and Wang Ziwu, Caixin Online
BEIJING (Caixin Online) -- The Chinese government investment in U.S. Treasury bonds officially shrank to $755.4 billion in December, down $34.2 billion from the previous month, an apparent sell-off that technically allowed Japan to bump China as the world's top-ranked holder of Treasury securities.
U.S. statistics released by the government's Treasury International Capital System (TIC) registered the move as the largest single decline for China's stash of U.S. government bonds since August 2000.
And set against the backdrop of escalating trade friction between the United States and China, as well as increasingly vocal calls for yuan revaluation, China's apparent move to reduce U.S debt holdings stirred controversy. For example, some speculators wondered whether China may have been dumping Treasurys to convey a political message.
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But in fact, according to sources close to the People's Bank of China, the nation's total holdings of U.S. debt did not fall at the end of 2009. Rather, the source said, the TIC data painted an incomplete picture of China's holdings.
Meanwhile, investment-bank analysts pointed to possible indirect buying channels for China in Britain and Hong Kong, adding that Washington's data compilers failed to account for T-bonds bought by the Chinese government through proxies.
Indeed, financial observers said any significant decrease in Treasurys would offer China no benefits because it could drag down T-bond prices and reduce the value of China's foreign reserves.
Banker perspective
Standard Chartered Bank analyst Yan Jin said a closer look at Treasury statistics sheds light on China's possible use of intermediaries to indirectly buy U.S. government bonds.
For example, Yan said, TIC data could be misleading because it accounts for geographic locations rather than the identities of T-bond buyers. Hints of these kinds of skews can be found in Standard Chartered reports which, based on monthly and annual TIC data analyses, found a correlation between rising U.S. government debt purchases by China and a decline in U.S. government debt held by Britain every year since 2003.
In other words, Yan and other analysts think China has been indirectly purchasing bonds through intermediaries in London.
Yan noted that final determinations would be difficult before the release of all-year data. And she noted that a relatively rapid rise in short-term debt purchases in Hong Kong in 2009 did not rule out the possibility that Hong Kong companies are acting as intermediaries.
TIC's means of T-bond buyers also may raise red flags. Shi Lei, an analyst with the Bank of China's Global Financial Markets Department, warned this data could create misunderstandings about China's investment decisions. For example, he said, China might be seen as reducing its bond holdings as part of a bargaining strategy taking aim at the United States.
"In the current climate, China's move to reduce its U.S. government debt creates a large propensity for misunderstanding," Shi said.
In fact, Shi said, U.S. government bonds remain a popular hedging instrument among Chinese government investment decision-makers. And in the current market, sellers technically remain in the driver's seat.
"Even though China didn't buy (bonds)," Shi said, "there were still many other countries willing to purchase U.S. Treasury securities."
Moreover, for China, dumping T-bonds could be counterproductive. "A massive sell-off of U.S. government bonds brings no benefit to China" considering that U.S. bonds are the investment target for an overwhelming proportion of China's foreign-exchange reserves, said China International Capital Corp. (CICC) macroeconomic analyst Liu Aolin.
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