Brad Setser

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May TIC Data: Still Buying US Assets But Just the Liquid Ones

by rziemba
July 17, 2009

This is Rachel Ziemba. Brad will I think be back soon but I figured I’d get in one last post going into some excessive details on the Treasury International Capital (TIC) data.

These days, the TIC data released monthly by the US Treasury and detailing the capital flows to and from the U.S. often seems anti-climactic given sharp moves in the fx and treasuries market. Despite the lag, data released yesterday and detailing May purchases tells a few interesting stories.

Most importantly, it illustrates the fact, that in the face of capital inflows to overheating emerging market economies in May, the central banks of these countries kept buying U.S. dollar assets. Q2 has been the first quarter of significant reserve accumulation of the last year. Preliminary estimates we’ve done at RGE Monitor suggest that reserve accumulation was around $180 billion in the quarter (adjusted for valuation), the first significant increase since mid 2008. As in 2008, China accounts for the bulk of the accumulation.

Despite supra-national reserve currency rhetoric given the reluctance for currency appreciation, there was little choice to buy dollars. China added $38 billion in U.S. short and long-term treasuries – a net increase of $26 billion in U.S. short and long-term assets. The discrepancy can be explained by China’s reduction in its USD deposits and continued reduction in agency bonds.

However, they shunned the long-term assets. The major foreign buyers of US assets went back to the short-end of the curve, buying T-bills and adding other short term claims. Total purchases of T-bills by foreign official investors were $53.1 billion.

This move could help explain why long-term treasury yields rose in May. With concerns about the U.S. fiscal position, worries expressed by major U.S. creditors about the dollar’s value, perhaps the move to the short-end of the curve is little surprise. It also suggests that the U.S. government is again becoming more reliant on bills financing as it was towards the end of 2008. This may not be sustainable in the longer-term.

While the decrease in the US current account deficit means that the U.S. may be less reliant on foreign finance in 2009, the U.S. has become even more reliant on China as a share of its foreign finance. China has been the largest reported holder of U.S. treasuries for some months now. But as of May China now accounts for 20% of total outstanding foreign holdings and almost equals the combined holdings of Russia and Japan.

Since last fall, China dramatically scaled up its purchases of the shortest term, most liquid U.S. assets. It has purchased $196 billion in treasuries of less than 1 year maturity from July 2008 to May 2009. In part this might reflect a shift last fall within China’s US dollar portfolio. It also vastly decreased its holdings of US agency bonds, while slightly adding long-term treasuries.

However, as the chart below shows China’s purchases of long-term US assets fell sharply in the last year and continue to fall.

12 month rolling sums of Chinese purchases of U.S. assets

China USD holdings

So why short-term assets? Investing the most liquid assets could keep funds freer for other purchases, including the extension of dollar denominated loans to resource countries. In theory, with shorter maturities, China could allow these assets to expire and not re-purchase them. However, in an environment where Chinese growth is re-accelerating, Q2 is unlikely to be the last with hot money inflows. As a result, expect further dollar purchases. No wonder Chinese officials were worried about USD holdings this spring given how many US assets they were buying.

Like China, Brazil also added short-term claims in May, with $12 billion in short-term claims offsetting net sales of $9 billion in treasury bonds. Short-term treasury holdings rose by almost $10 billion. Brazil has also been wanting to diversify its reserve holdings.

What of the Gulf, the major creditor region, visited by the Treasury secretary this week? Asian oil exporters likewise added to short-term holdings in May, prompted likely by local liquidity needs even more than dollar value worries. Given lower oil prices, the regions sovereign wealth funds have fewer new funds at their disposal. That may be changing slightly, yet, the increase in domestic spending and reduction in oil output limit new funds available. Meanwhile with the shifting from the dollar peg off the table as a policy option reserve diversification is limited. Moreover, given the pegs, their need for dollar liquidity and dollar financing remains high.

Based on the reported data, the GCC has a reported dollar portfolio of about $400 billion – $140 billion in U.S. equities, which hasn’t budged much in the last 2 years. Holdings of long-term treasuries increased from by about $30 billion from June 2008 to May 2009 to almost $200 billion despite a slight decrease in May. Holdings of Agency bonds fell by about $10 billion though.

The GCC total dollar portfolio is likely significantly bigger – over half of the estimated $2 trillion managed by public and private sector GCC investors. The discrepancy can be explained by the GCC tendency to buy through intermediaries. However, it seems likely that the use of local intermediaries has increased. The flows from the GCC have been higher in the last year. But again, the currency pegs may constrain the GCC to dollar purchases.

Japan, Russia and Canada, had notable net sales of U.S. assets in May. Japan’s shrinking current account surplus could reduce the amount of US assets it buys.

Canada’s sales may reflect the shift away from government bonds to equities outside of the U.S. in the midst of the rally.

Russia’s net sales, mostly of short-term assets, seem to be a bit more puzzling. Russia has been reducing its U.S. dollar assets from some time but given the inflows Russia received, one would have expected dollar purchases. In fact Russia’s central bank data on its fx interventions suggests that it bought $18 billion in US dollars in the month of May. Russia could be adding to offshore dollar deposits that would not be captured in U.S. data.


  • Posted by df

    There you have it : higher long term nominal rates, in a time of deflation.

    Call it recipe for debt deflation depression.

    Nothing surprising here …

  • Posted by Cedric Regula

    Macro Man had a recent funny post about “Helicopter Wen”. Says he makes Helicopter Ben pale in comparison.

    China actually succeeded in getting 25% M2 growth, which is great news for M2 growth fans worldwide. And this resulted in 7.9% GDP growth in the latest quarter(which of course makes we wonder if any economists have some sort of “multiplier” for this?). But at any rate, Macro Man points out that the last time China had M2 growth like that was in the ’90s, and then the banks exploded.

    As a result, we have hot money flowing to China again. This of course would be a large part of recent reserve growth there.

    So what kind of picture do we have here? Looks to me like China is now re-cycling equity investor flows back into US T-Bills. This is so they have liquidity in case they need it to cover hot money outflows and bail out Chinese banks once they blowup again. In the meantime, they will be financing the US financial system bailout.

    Strange world.

  • Posted by Indian Investor

    Totaling net additions for the three months from Feb to Apr 2009, you hardly get any net inflow of capital from China. And if you total all long term and short term net flows for May, it’s a net inflow of $26 b in May 2009, as Ms. Rachel has detailed above. Of course, Chinese flows to Treasuries are larger in volume, though mostly focused on short term treasuries.
    The recent development was riots in China’s Western Zingjiang Province. Hu Jintao was forced to leave the G-8 at L’Quila to handle the aftermath of the Uyghur protests in what they see as a demand for democracy and independence from China in what they call as East Turkestan (a non existent region). Beijing has roundly blamed the American Uyghur Association, and in turn, Washington, for fomenting hostile public disturbances in China’s territory.
    Of course Cedric and other long term followers of this blog will recollect my frequent commentaries on the importance of the Atyrau-Alashankou pipeline. Washington is trying to prevent replacement of the dollar as an international reserve currency by destroying Beijing’s access to natural resources from the Caspian. When I predicted three months ago that Xingjiang will be the next Kashmir, Dr. Setser deleted the useful insight as being geopolitcal and irrelevant to his blog.
    But it’s happening, even as I type this up. The Department of State is making a Kashmir out of Xingjiang, just as I thought they would. All China patriots are advised to visit the strategically important customs checkpoint in Alashankou and scrawl their graffiti there. If Washington has its way, that whole area will no longer be part of China.

  • Posted by Cedric Regula


    Quite the conspiracy theory. For one thing, I didn’t know we had an “American Uyghur Association”, but it doesn’t really surprise me that we do. Many space alien races have American associations and lobbyists in Washington DC as well(See Men in Black for reference). Also, I always thought Uyghur was that weird little hunchback guy in the Frankenstein movies.

    But I guess the shocking truth is that the major players in the world are in a perpetual battle over oil resources. In the case of the Caspian region, there is debate about whether it is part of the Middle East, South Eastern Europe or Western Asia. Two of those three are American territory.

    Personally I don’t care how that turns out because I’m not an oil/pipeline company with investments in the outcome. I just figure oil goes into the global pot, and then I get charged the global market price.

    But I do think that if the US dropped out of the fight, then that would leave China and Russia as the remaining combatants.

  • Posted by Jen H


    Great post, thank you. Two quick questions– on the GCC, whats your guess as to the motivating factor(s) behind the uptick in dollar purchases? Their inflation numbers look relatively tame, so I don’t really see that its peg related? Probably not an offering of goodwill either?

    And totally unrelated, have you been surprised by the euro’s relatively strong showing against the dollar in recent weeks, even despite the scary amnt of E Eur debt due for refinancing, and China’s return to dollars and LT-treasuries?

  • Posted by Twofish

    Cedric: Macro Man points out that the last time China had M2 growth like that was in the ’90s, and then the banks exploded.

    That’s not a cause-effect relationship. The banks had huge NPL’s because the state ordered them to loan out huge amounts of money to allow factories to keep paying people for doing nothing rather than have them end up on the street demonstrating. This happened in the early 1990’s.

    Think of it as a massive stimulus package, in hindsight, this is probably a good thing that they did that.

  • Posted by Cedric Regula


    FYI, Men in Black was originally filmed as a docu-drama. Back in the late 90s, the Fasteni of Vorlon decided to emigrate to Earth due to overcrowding and lack of job opportunity on Vorlon. Naturally, the Men in Black settled them in Brooklyn until they could find their way around the US job market.

    The Fasteni have long, screwdriver shaped noses that rotate when they laugh, and they also discovered that bananas are their favorite Earth food. The UAW found out about this and union management became terrified. The Union contacted Michael Moore to film a documentary and expose this threat to the American worker. Michael quickly agreed and within a year shot lots of footage of not only the Fasteni, but scores of other space aliens as well.

    Michael realized he was in over his head when it comes to creating a first class full length documentary, so he went to the Hollywood studios for help. Thus began the docu-drama project complete with big budget, real film editors, and big name stars.

    The Men in Black found out about the leak and though the “flashy thing” can erase memory, film evidence still existed. So they enlisted the CIA and NSA to pressure Hollywood into canning the project and turning over the film evidence.

    This happens all the time in Hollywood and they routinely tell the CIA and NSA to pound off. So the NSA decided to enlist the clandestine organizations they use when they must distance themselves from dirty deeds…U.N.C.L.E and the legendary but officially non-existent Control.

    So one morning Micheal Moore woke up and noticed his pet cat, Nurse Kitty, was missing from bed and a shoe phone was in her place! The shoe phone rang and a electronically disguised voice said, “Do not release this film as a docu-drama, or Nurse Kitty gets it ! Got it punk?”

    Shaking and almost in tears Michael calls the studio and “confesses” his alien footage was done with CGI, and he would not be able to verify the authenticity of the docu-drama.

    The studio had no choice but release it as a comic book movie.

    This story is well known in Southern California, because Hollywood is rotten at keeping secrets, but for some reason the tabloids did not pick it up and publish it elsewhere. Did the Man from U.N.C.L.E get to them? We can only speculate.

  • Posted by Indian Investor

    Cedric, So. Who’s the conspiracy theorist?The massive unrest you see in the photos at this Western sponsored link was all caused because TWO Uyghurs were killed in a factory dispute?

  • Posted by Cedric Regula


    Hmmm…looks like the work of the Mission Impossible team. I guess the USG may have offered their services to the muslim American Uyghur Association.

    At least the Party tried to shut down the Internet and keep people from getting even more riled up.

    I was thinking they could say the pictures are from Detroit, but then again that wouldn’t seem believable with all the Chinese signs on the buildings.

    Lying is hard to do, and make it sound believable.

  • Posted by Indian Investor

    Cedric, you can read about the considerations that led to the Uyghur riots at this link (, an essay by Dr. Robert M Cutler. Dr. Cutler describes the tremendous stakes involved – the conflict between the Kazakhstan Caspian Transportation system and the China National Petroleum Corporation over the Tengiz oil.
    One possibility was “Now that Kazakhstani oil will have another route to the OBP, its flow will be reversed back to the originally intended direction. From Brody, the oil will flow to Plock, Poland, since higher world prices have made this continuation of the OBP economically justifiable to construct; from Plock, an existing pipeline goes to the port of Gdansk and thence to world markets.”
    And the other was: “For China to receive Tengiz oil, then, it would need only to build the missing segment from Kenkiyak to Kumkol, and reverse the Aktobe-Atyrau pipeline so that it flows from west to east. The result could eventually boost Chinese imports of Kazakhstani oil from 100,000 to 400,000 bpd, …”
    And what happened, to cause such a massive Washington intervention in Xingjiang?
    On July 15, 2009, CNPC made the following announcement in a press release:
    “On July 11, the Kenkiyak-Kumkol section of the Kazakhstan-China Oil Pipeline was put into operation.”

  • Posted by Indian Investor

    And who’re all the people interested in disrupting political stability in Xingjiang? From Dr. Cutler’s essay, the stakeholders in the KCTS:
    “Parties to this agreement are the national energy trust KazMunaiGaz, TengizChevrOil (the consortium developing the Tengiz field, led by Chevron), and Agip KCO (the consortium developing the Kashagan field, formerly led by Eni: comprising the national company KazMunaiGaz, holding 16.81%; Eni, Total, and ExxonMobil, and Shell, each holding 16.66%; and ConocoPhillips and Inpex, each holding 8.28%).”

  • Posted by Cedric Regula


    I found this to be an informative and factual article:

    But I don’t see where the author connected the dots to riots in China. And it’s not certain that Poland will get Caspian Sea oil, even tho we all know that would be a top priority of the USG as a reward for accepting US defensive missles which we can threaten Russia with.

    And finally Putin is getting his often wished for result. The new pipeline to China will keep Russia from having to pipeline all the oil from the Caspian Sea. That’s a lot less work for them.

    And our Western oil companies are doing exacly what I think they do. Chevron, Exxon, Eni and Total are developing the fields and selling the oil to China. We used to worry that China would do that if they got their hands on any oil fields.

    So the last dot to connect is explain why Chinese muslim factory workers are rioting to keep oil out of China and support Dollar Hegemony because the USG government wants them to do that.

    Give me a little time on that one.

  • Posted by Indian Investor

    Cedric: “Chevron, Exxon, Eni and Total are developing the fields and selling the oil to China. We used to worry that China would do that if they got their hands on any oil fields.”

    The Kumkol fields are owned jointly by China National Petroluem Corporation and Kamunaigas – basically the crude belongs to the Beijing and Astana regimes. Apart from owning huge stakes in the fields, CNPC also owns and operates the new oil pipeline that takes the Kumkol crude to Alashankou. Here’s a link to The Department of Energy list of major oil and gas projects in Kazakhstan:
    Kumkol North is owned by Turgai Petroluem, PetroKazakhstan (50%) and Russia’s LukOil. Kumkol South is wholly owned by PetroKazakhstan. In 2005, PetroKazakhstan was acquired by CNPC, and in turn 33.3% stake in PetroKazakhstan was sold to Kazmunaigaz, a Government of Kazakhstan entity.

  • Posted by Indian Investor

    Cedric, here’re your missing dots:

    MAY 21, 2009
    TIME: 9:30 a.m. – 1:00 p.m.
    VENUE: Congressional Meeting Room South
    United States Capitol Building
    Washington, DC 20515

    HOST: Mr. Alim Seytoff, WUC Executive Chairman

    09:30 – 09:40 The Official Opening of the General Assembly
    09:40 – 09:50 The National Anthems of East Turkestan & the USA
    09:50 – 10:00 Ms. Rebiya Kadeer, WUC President
    10:00 – 10:10 The Honorable Lincoln Diaz-Balart, Member of Congress
    10:10 – 10:25 The Honorable Chris Smith, Member of Congress
    10:25 – 10:40 The Honorable Frank Wolf, Member of Congress
    10:40 – 10:55 The Honorable Bill Delahunt, Member of Congress
    10:55 – 11:10 The Honorable James McGovern, Member of Congress
    11:10 – 11:25 The Honorable Sherrod Brown, Member of Senate
    11:25 – 11:35 Ms. Barbara Haig, NED Vice-President
    11:35 – 11:50 Mr. Hans Hogrefe, Director of TLHRC
    11:50 – 12:05 Ms. Kara Abramson, CECC Advocacy Director
    12:05 – 12:20 Mr. Marino Busdachin, UNPO General Secretary
    12:20 – 12:35 Mr. T. Kumar, Asia Director of Amnesty International USA
    12:35 – 12:50 Mr. Bhuchung Tsering, Vice-President of ICT
    12:50 – 13:00 Ms. Tienchi, Director of the Laogai Research Foundation

  • Posted by Cedric Regula

    Ok, I give up.

    My number one suspect was Al Jazeera has a Chinese language website.

    But we have kooks in Congress. What next.

    Gotta link to this? Reading the transcripts may be in order, since I may have missed it on CSPAN.

  • Posted by Cedric Regula

    Found the link.

    This is another human rights organization. Anytime there are mistreated groups in the world, they believe Washington DC is the place to go and air their grievances. In fact, that is why all the space aliens are here. You can imagine how difficult it is for Washington to formulate foreign policy that makes the entire galaxy happy. Just never is going to happen.

    But I know from reports of off world activities, many times these oppressed groups take action of their own volition without the express support of Washington.

    So I still think it’s possible the riots happened without orders from President Obama, or even a motherly wink from Hillary.

  • Posted by MichaeloBSB

    re; Cedric & Indian

    Thanks for the opportunity to ‘listen’ to 4AM radio talkshow banter during the day !

    Good day all

  • Posted by John McLeod


    If I may be allowed to briefly revisit the topic of the above post …

    First, thanks for that bit about Canada leaving government debt to buy into the equities rally. Do you think the Bank of Canada’s head being a GS alumnus might have anything to do with that?

    That squeeze-off of the red zone of Chinese agencies was fascinating. We’ve been following the foreign central bank holdings of Agency Debt from NY Fed’s weekly H.4.1, and that number had been hovering weirdly just over $800 billion since late December ’08, but has now broken below.

    Meanwhile cbanks bought enormous piles of treasures in 4 of the last 10 weeks, but about zilch in 2 other weeks in the last 10. That can’t be healthy, and since the chart of those treasuries holdings has lately been climbing up the wall, the news that the central bankers seem to be leaning towards the door is most disturbing.

    Sure looks like a bubble preparing a top.

    Comment on the off-topic CR & II show …

    I was hoping to borrow Cedric’s “Men in Black” satire in aid of my recent post on the appropriateness of comics at Dept. Treas. (and no, I’m not trying to be sarcastic) but on rereading it I feel it’s not quite, well, comical.

    I’ve been interested for some time in how, for example, the IPI “peace” pipeline might change the game East of Eden. Didn’t learn a whole lot from the above, though. Too bad, as I’ve been worrying about this stuff for a long time.