Comments on: I am pretty sure China didn’t sell Treasuries in April (or May, for that matter)

By: CB

CB — Mon, 22 Jun 2009 18:34:24 +0000

Hey Brad,

Where did you get the data for the green line in the first graph? I have looked at the survey that you are referring to (I think it is: http://www.ustreas.gov/tic/shla2008r.pdf), but that doesn’t show monthly data. What data did you take out of the survey to adjust your graph? Also, how do you know how much the U.K. is selling to China?

By: Twofish

Twofish — Mon, 22 Jun 2009 04:43:43 +0000

Indian Investor: China has found ways to reduce their stock of Treasuries in ways that don’t create a corresponding demand for RMB.

I don’t think so. None of what is happening is “planned” by the Chinese government, and they are just reacting to events.

The interesting thing to look at is “errors and omissions”. That’s the difference between the trade balance and the increase in treasury reserves. For most of the last few years, it’s been positive, but it looks like it has turned sharply negative.

By: Twofish

Twofish — Mon, 22 Jun 2009 04:40:17 +0000

Cedric: The PBoC states what the exchange rate is. Then they sell sterilization bonds and increase state bank reserve requirements.
They do some small scale things with Forex, but probably just enough so tourists can get some RMB before heading to China on vacation.

This is false. If you try to set the foreign exchange rate through administrative means, you end up with thousands of people on street corners offering to change money for you, and you haven’t had this happen in China since the mid-1990′s.

I’m not sure what the People’s Daily article is referring to, but Chinese involvement in foreign exchange is not small since pretty much every trade transaction involves some currency exchange, and China has had swap centers to trade currency since at least the early 1990′s.

By: Reports of Beijing Selling Off Its Treasuries Are Misplaced « China Bystander

Sun, 21 Jun 2009 18:07:21 +0000

[...] site is always worth the read for anyone following global capital flows, and especially his post questioning whether China sold down some of its Treasuries in April as U.S. Treasury’s [...]

By: Indian Investor

Indian Investor — Sun, 21 Jun 2009 12:50:33 +0000

Cedric/Twofish: Thanks for your analysis. I see this as a situation where China’s treasuries are being more widely disbursed, to suppliers of commodities, crude, gold, etc. China has found ways to reduce their stock of Treasuries in ways that don’t create a corresponding demand for RMB. Secondly China is very slowly creating a situation where China’s exports don’t lead to increased supply of USD against RMB, i.e. through currency swaps in small volumes, selective settlement of trade in RMB, etc.
At the same time, China is able to ensure the stability of the dollar peg. This situation, according to me, leaves the US with no option but to borrow in a foreign currency denomination, and, if possible, to borrow less from foreign countries than currently planned.

By: guest

guest — Sun, 21 Jun 2009 07:12:42 +0000

So,it seems that we are all in agreement the private sector is vanishing when the public sector is becoming larger as a lender and borrower of last resort.
Interest rates have proved themselves,to be an ill device(as much for Keynes)
Money supply has still to be back tested.

By: Cedric Regula

Cedric Regula — Sun, 21 Jun 2009 04:34:11 +0000

Indian:

Ya, I think Chinese companies deposit dollars at state banks, then the PBoC prints RMB to trade for Dollars with the state banking system. The PBoC states what the exchange rate is. Then they sell sterilization bonds and increase state bank reserve requirements.

They do some small scale things with Forex, but probably just enough so tourists can get some RMB before heading to China on vacation.

Here’s an article from 2005 talking about the scale of Chinese participation in FX.

http://english.peopledaily.com.cn/200505/19/eng20050519_185745.html

By: jonathan

jonathan — Sun, 21 Jun 2009 03:12:54 +0000

Loved the COFER graph. Would be neat to see that versus totals.

By: Twofish

Twofish — Sun, 21 Jun 2009 03:07:12 +0000

Cedric: They don’t do a true FX traded peg. The peg is really just telling those internal to China what the PBoC says the official exchange rate is.

Yes they do. The quasi-peg that the PBC maintains is a true FX traded peg. It’s not a currency board system, but to maintain the peg, the PBC has to conduct market operations.

Administrative pegs have *huge* problems, one of which is that it creates a black market, and the PBC abolished administrative pegging in 1993.

By: Twofish

Twofish — Sun, 21 Jun 2009 03:04:12 +0000

Indian Investor: Do you have any explanation for what changed, and allowed China to maintain its dollar peg, without accumulating more Treasuries?

Yes. There has been an increase in savings rates in the United States and a general flight to quality, and this increases the demand for the US dollar, which means that China has to buy fewer Treasuries to maintain the peg.

Indian Investor: The Chinese exporter then deposits the cheque in an RMB bank account, and the Chinese bank converts the currency at the going rate through a money changer, or the same bank’s forex department/branch.

What you are missing here is how the “going rate” is determined. The PBC targets a value that they want the exchange rate to be, and then they buy or sell enough dollars to keep that exchange rate. If there is an increase in demand for dollars outside of the PBC, they have to buy fewer dollars to maintain their target rate.