Is China Really Liquidating Treasuries?

The news that China has become the first sovereign to establish a direct sales relationship with the U.S. Treasury (therefore cutting out the middleman and bypassing Wall Street ) raises a few interesting questions.

From Reuters:

China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

The relationship means the People’s Bank of China buys U.S. debt using a different method than any other central bank in the world.

The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.

China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn’t been necessary.

The documents viewed by Reuters show the U.S. Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.

The biggest Chinese outflows in U.S. Treasuries occurred in the months following the establishment of this relationship:

Which begs the question for some analysts — was China really selling? Or was China stealthily buying direct from the U.S. Treasury (unrecorded) and selling back into Wall Street (recorded)?

Well, according to the Treasury, the Treasury International Capital data seeks to record foreign holdings of U.S. securities, not just the flows, and given that the Treasury was the seller in these direct transactions (and so obviously was aware of them) there’s no reason to believe that they wouldn’t include any such direct outflows in the data. That suggests very strongly that yes, China really was selling.

And maybe the real reason that the Treasury offered China direct access (thus cutting out the middleman and offering China cheaper access than ever) was precisely because China was selling, and because the Treasury was concerned about the effect on rates, and wanted to give China some incentive to keep buying. As Jon Huntsman noted in a 2010 cable leaked by Wikileaks, the PBOC has felt pressured to keep buying, and as various PBOC officials have hinted in recent months, China is actively seeking to convert out of treasuries and into gold. And that makes sense — treasuries are yielding ever deeper negative real rates. People holding treasuries are losing their purchasing power. No wonder the treasury is willing to cut Wall Street out of the deal.

And it isn’t like the Treasury would have taken this move lightly — cutting Wall Street out of the equation is a slap in the face to Wall Street.

This raises a much more interesting question — now that the PBOC has effectively been upgraded to primary dealer status, would the Fed start buying treasuries directly from the PBOC in order to manage rates downward and prevent a spike in Treasury borrowing costs should China choose to quicken the pace of a future liquidation, potentially bursting the treasury bubble?

55 thoughts on “Is China Really Liquidating Treasuries?

  1. So you think there is not just a Manchurian Secretary (Tim-mah) but also a Manchurian Chairman? QE參 to give the PBOC the free spread instead of JPM and Goldman? This all gets complicated real fast.

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      • Speaking from experience on my remote property, a couple of deep cycle batteries, a 12 volt solar panel (From Camping shops) an ac/dc inverter, and a low wattage TV and DVD player is sufficient for watching movies (We have 100 years of movie production to choose from). You can “vege” out eating your boiled cracked wheat topped with honey and sugar and condensed milk (Wheat Last 12 years in airtight jars, sugar honey and condensed milk much much longer).

        I admit this usually results in boredom after some time, but if compelled you can “wait out” a Black Swan US treasury liquidation.

  3. “would the Fed start buying treasuries directly from the PBOC in order to manage rates downward and prevent a spike in Treasury borrowing costs should China choose to quicken the pace of a future liquidation, potentially bursting the treasury bubble”

    Yes, it would have to. They’d face carnage otherwise, with rocketing interest rates.

    • The question then is would China take the dollars. The Fed may have that in mind. China may have something entirely different in mind.

      • What else could they offer? I’m sure they wouldn’t want to break open the yellow metal stores at fort Knox. Would they be buying equities? Corporate bonds?

        China’s going to be need of some fairly hefty resources if they’re going to avoid a hard landing. Even to keep things steady they’d need to increase house building, despite massive unsold inventories. They’re hitting the buffers of whats practical in fixed asset investment terms.
        I can’t help thinking it’s part of a stealthy effort to reconvert back into Yuan, to bail out their banks and regional governments, but without strenghtening the currency.

        • How did the Ottoman Empire pay back its huge debt to European nations? It seems to me, when a mammoth sovereign debt cannot be rolled over any longer, the payment is in pieces of empire. No more aircraft carriers in Taiwan. No more assistance to Philippines in their South China Sea disputes. Etc.

        • I agree with Gavinengel. The USA wil lose its influence in SE Asia. SE Asians will look to China for support.

          The USA would be better off forming an America’s union with Canada to South America. The EU federating fiscal policies (See Australia’s Federal System)

          Nation states are finished. But I think global trade/nation blocks based on race & religious histories makes sense.

        • Syn:

          Point is, they may not come to the table at all. America may have been Sun Tzu’d here. They may use a treasury spike as a means to get political concessions.

          The dizzying thing about Eurasia is China can get everything it wants (yes — including consumers) domestically or elsewhere on the Eurasian continent. America (huge shipping costs and belligerent government) may become an afterthought.

        • Yeah, szun Tsu’d maybe.

          But I think something else is going on, or at least will do. I reckon the long prophesised ( by china bulls) great Chinese slowdown is occuring and that will set at nought all the clever decades long plotting by the communist party. They’re going to need those treasuries and piles of foreign cash to keep their economy propped up and themselves in power.

          as long as the derivatives ponzi doesn’t screw the west ( in which case all bets are off), the flow of power towards the east will slow or even in the short term reverse.

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  5. China will not liquidate US Treasuries. Chinese officials know too well that if they don’t support the US administration (Now and future ones) they can kiss their Citizenship request good bye.

    I don’t care if they say they support the Communist party or China. Individuals are selfish and they will want to protect their future interests.

    The Russians and Chinese governments will support the USA. They will request painful structural changes but they won’t bail on the USA.

    • I don’t know — they have an awful lot of leverage. They may try to use this to get concessions, and I don’t want to say that there will be nothing behind such threats. What does China really need from the USA that it doesn’t have domestically or that it can’t get from friendly neighbours (e.g. Russia)?

      To keep China buying the USA will have to do much more than give it primary dealer status. About the only thing China wants that the USA and no-one else has is certain military technologies, and I doubt they will just start handing those overs. So we will get to see a deeper liquidation, I think.

      • They don’t need US millitary technologies. Russian technology is sufficient and is field tested for Chinese conditions. 1 billion armed citizens with AK47’s is better than 100 million US Soldiers with more accurate guns. Think Stalin versus Hitler. Germany had superior weapons but still lost due to Russias man power (albeit sacrificed).

        They will posture politically to look good in terms of domestic political needs but behind closed doors they are “thick as thieves”.

        Who will suffer are the Chinese and US lower classes. If China was a true communist country they would gear their exports for internal consumption (Deflation which will enable lower classes to afford the goods they make for the West). But they won’t. They will fund the Deficit with cheap goods, because the upper middle classes benefit from the higher prices received..

        Basically China’s elite will kiss their US citizenship (And their family’s study and citizenship options) if they refuse to buy Treasuries.

        • That is an interesting thought, that China’s elites may hesitate to offend the U.S. out of fear of losing their escape plan. Isn’t it true that something like half of the wealthy class there either has or is trying to get U.S. visas? I know it has been discussed here before and it is supposedly a huge number. Certainly not a vote of confidence in their own country. I guess the U.S., despite all our problems, is still the place people want to run away to.

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  9. As noted by Gavin above it is ironic that the finacial system and players who brought the Ottomon empire down are now doing it to their own homelands Europe and the US.

    The US can just default on its debt obligations…China can stuff it. I am not sure I like the Chinese way… they do not even have domestic pets they eat them. Such people are not fully human.

    • Rob
      “The US can just default on its debt obligations…China can stuff it. I am not sure I like the Chinese way… they do not even have domestic pets they eat them. Such people are not fully human.”

      Way to generalize over a billion people into a racist stereotype. You clearly don’t know anything about the Chinese people and their culture. Do you ever eat beef? If so, according to your logic, you are ‘not fully human’ since Indians hold cows to be sacred. I bet everything you eat is considered a ‘pet’ by someone in the world. I take no issue with criticizing the Chinese government’s economic policy, but this is just an infantile attack founded on ignorance.

      We are all the same people making do with the circumstances we were born into. Most of the Chinese are just struggling to survive, working as wage slaves to manufacture the cheap goods Westerners consume without appreciation for the sacrifices that sustain their unending appetite. There are blood and sweat and tears on your Nikes and iPads even if you can’t see it. If there truly was a just and compassionate God, these unfortunate folk would be rewarded for their labors. But there is no God, and if there is, he does not give a damn about any of us.

      Instead, the Chinese are ruled by a leadership caste that is second only to the Russians in its kleptomania. The Chinese today are less happy than they were in 1990 because back then at least everyone was poor. You weren’t doing so well, but you knew your neighbor and the local officials were in the same boat. Now China is experiencing the runaway wealth disparity that comes with crony capitalism, and the poor have become the grass the powerful trample over in their race for the top. The Communist Party was founded as a party for the poor and marginalized members of society. Now it is anything but. So if you want to condemn anyone, condemn the government, but leave the people out of it. Most of then have no more say than you or I, less so considering their censorship laws.

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  13. In the end we are selling them a bunch of worthless paper. One way or another we will default, probably through currency collapse or debasement.

    In the end the only one who gets “paid” is whoever has the biggest gun. Unless they eventually get a military to compete with the United States they are being played for a bunch of suckers. China – and unfortunately the American people – are being “Bernie Madoffed” by the treasury.

    Mao Zedong had one thing right at least. “Political power grows out of the barrel of a gun”. Now China is well aware of this as they build up their military. However, the U.S. is the sole military powerhouse. This fact is the final bargaining chip, and the real “hard asset” that backs U.S. dollars and bonds.

    • Agreed. The Taliban, Saddam and Qaddafi (Possibly Bashir) learnt the hard way. North Korea is backed by China and nukes.

      Be good NWO patriots and we’l give you a Visa.

      Be bad NWO patriots and we’ll send our youth with very expensive toys to wreak havoc.

  14. Is the US inflation rate higher than 2.85%

    30 year treasuries are 2.85%

    Have we gone negative real yield on 30 year bonds yet?

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  32. Aziz, you use “begs the question” incorrectly (first paragraph after the chart) — you mean “raises the question,” as you say correctly in the last paragraph. Just saying.

    • You’re right. I’ve always used the term “begs the question” as a synonym of “raises the question”, which now I look it isn’t.


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