Revisions to the holdings of US Treasuries have set the chins wagging. The key focus is on China’s holdings of Treasuries.
While the new data revised sharply higher June 2011 Chinese holdings to $1.307 trillion from $1.165 trillion the data points to a sharp decline in the second half of last year. Holdings peaked at $1.315 trillion in July and finished the year near $1.152 trillion. There are several reasons why observers and investors should not be very concerned about the report.
1. The $163 bln decline in China’s Treasury holdings $103.4 bln took place in December alone. This is preliminary and subject to revisions. The revisions also mean that China has about $50 bn more Treasuries that the TIC data previously suggested before revisions.
2. It appears that China may have shifted some funds from Treasuries to Agencies, especially given the persistent speculation of a new round of Fed asset purchases to be focused on mortgage-backed securities.
3. The decline in China’s holdings has been more than offset by other buying. The revised figures show foreign investors own about $5 trillion of Treasuries as of the end of last year compared with $4.4535 trillion at the end of 2010. Over the period China’s holdings fell a little more than $8 bln. Japan’s holdings rose $176 bln in 2011, all coming in the second half. Russia’s holdings were revised sharply higher, though were flat on the year. Belgium, France, and Ireland holdings were revised higher.
In contrast, the UK as revised sharply lower and this reflects the fact that the revisions are essentially distributing the holdings from the financial center to the owners.
4. This point is also further underscored by the fact that in the second half of last year 5-10 year Treasury yields declined by about 100 bp.
5. Less demand for Treasuries coincides with a smaller Chinese current account surplus. China’ current account surplus is about a third of what it was prior to the global financial crisis.
6. This is perhaps what is most overlooked, this is unlikely to disturb US officials one iota. Across Administrations, the US has argued that China should stop intervening and allow its currency to appreciate and to shift away from the export-driven model. The net consequence of this would be for China to buy fewer Treasuries.