China sells US trea­suries to sup­port yuan

The Pak Banker - - COMPANIES/BOSS -

China has cut its hold­ings of U.S. Trea­suries this month to raise dol­lars needed to sup­port the yuan in the wake of a shock de­val­u­a­tion two weeks ago, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter. Chan­nels for such trans­ac­tions in­clude China selling di­rectly, as well as through agents in Bel­gium and Switzer­land, said one of the peo­ple, who de­clined to be iden­ti­fied as the in­for­ma­tion isn't public. China has com­mu­ni­cated with U.S. author­i­ties about the sales, said another per­son. They didn't re­veal the size of the dis­pos­als.

The Peo­ple's Bank of China has been of­fload­ing dol­lars and buy­ing yuan to sup­port the ex­change rate, a pol­icy that's con­trib­uted to a $315 bil­lion drop in its for­eign- ex­change re­serves over the last 12 months. The $3.65 tril­lion stock­pile will fall by some $ 40 bil­lion a month in the re­main­der of 2015 be­cause of the in­ter­ven­tion, ac­cord­ing to the me­dian es­ti­mate in a Bloomberg sur­vey.

China selling Trea­suries is "not a sur­prise, but pos­si­bly some­thing which peo­ple haven't fully priced in," said Owen Cal­lan, a Dublin-based fixed- in­come strate­gist at Can­tor Fitzger­ald LP. "It would change the out­look on Trea­suries quite a bit if you started to price in a fairly large liq­ui­da­tion of their re­serves over the next six months or so as they man­age the yuan to what­ever level they have in mind."

The PBOC and the U.S. Em­bassy in Bei­jing didn't im­me­di­ately re­spond to re­quests for com­ment. Bill Gross, who man­ages the $1.47 bil­lion Janus Global Un­con­strained Bond Fund, tweeted Wed­nes­day "China selling long Trea­suries ????".

Two- year Trea­suries erased an ear­lier ad­vance, with their yield lit­tle changed at 0.67 per­cent as of 11 a.m. in Lon­don. It fell as much as two ba­sis points. The 10- year yield de­clined three ba­sis points to 2.15 per­cent, near to its av­er­age for the past month. Chi­nese sales of U.S. gov­ern­ment debt may have kept yields from fall­ing this month as a sell­off in global stocks prompted in­vestors to fa­vor the safest as­sets.

"By selling Trea­suries to de­fend the ren­minbi, they're pre­vent­ing Trea­sury yields from go­ing lower de­spite the fact that we've seen a sharp drop in the stock mar­ket," David Woo, head of global rates and cur­ren­cies re­search at Bank of Amer­ica Corp., said on Bloomberg Tele­vi­sion on Wed­nes­day. "China has a di­rect im­pact on global mar­kets through U. S. rates." The latest avail­able Trea­sury data and es­ti­mates by strate­gists sug­gest that China con­trols $1.48 tril­lion of U. S. gov­ern­ment debt, ac­cord­ing to data com­piled by Bloomberg. That in­cludes about $200 bil­lion held through Bel­gium, which No­mura Hold­ings Inc. says is home to Chi­nese cus­to­dial ac­counts.

The PBOC has sold at least $106 bil­lion of re­serve as­sets in the last two weeks, in­clud­ing Trea­suries, ac­cord­ing to an es­ti­mate from So­ci­ete Gen­erale SA. The fig­ure was based on the bank's cal­cu­la­tion of how much liq­uid­ity will be added to China's fi­nan­cial sys­tem through Tues­day's re­duc­tion of in­ter­est rates and lenders' re­serve- re­quire­ment ra­tios. The as­sump­tion is that the cen­tral bank aims to re­plen­ish the funds it drained when it bought yuan to sta­bi­lize the cur­rency.

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