China Sells U.S. Treasuries to Support Yuan

http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-sell-treasuries-as-dollars-needed-for-yuan-support

by randomname2 • 11 years ago

301 202 11 years ago

bloomberg.com

gwbas1c• 11 years ago

Gosh, I'd love to see other people's opinions on this article!

mrits• 11 years ago

"China sells to China"

dageshi4• 11 years ago

Well pretty much the purpose of those reserves is to maintain their currency peg so selling in order to do so is no surprise.

beauzero5• 11 years ago

They are not trying to maintain their currency peg. They are slowly devaluing to eventually decouple (see IMF year delay comments). The treasury sales, which no one other than China really knows why, are continuing at an extremely rapid pace and the best guess is they are using it to inject liquidity into their market in order to prop up their stock market bubble.

dageshi4• 11 years ago

The Chinese care more about the ability to "control" their peg than they do anything else. What they don't want under any circumstances is a black market exchange rate that differs substantially from the official rate. Because once you have that the government no longer controls the exchange rate. So they have devalued a relatively small amount and now they must maintain the peg at the new level, if that means selling a boat load of treasuries to do so, so be it, that's the purpose of holding the treasures.

To your point on selling USD denominated debt to prop up the stock market.. why? They Chinese stock market is denominated in Chinese Yuan, not USD, if they wanted to prop up the market they could just print the yuan and buy stocks, they don't need to sell Treasuries at all to do that.

jhulla2• 11 years ago

Sell Treasuries --> USD Cash

What is being done with the USD Cash generated after the sale? Are the Chinese immediately selling the USD Cash to local CNY holders in order to defend the peg? What do they do with it next? Is the new USD Cash leaving Chinese borders? Does it stay in local accounts - eventually to be used to buy up other USD denominated assets?

chkuendig• 11 years ago

as the article says, they try to keep the yuan up. so they sell treasuries and buy yuan with the usd from the sales. (what they then do with the yuan doesnt matter, its theirs anyway)

jhulla2• 11 years ago

What is not clear is this:

1. Who is selling the CNY for USD? Specifically is it another arm of the government?

2. More importantly: what is the new holder USD allowed to do with their newly acquired USD cash pile? Are they allowed to transfer it out of the country? Or are they required to keep it in USD, but it in Chinese banks? Are their restrictions on what they can buy?

deathhand3• 11 years ago

My armchair hypothesis is that Chinese central planning allows them to off-set the burden of USD to large corporations(Sinopec,ICBC) and purchase cheap energy. With current crude prices they can easily purchase large enough volumes to increase the price and hold on to a valuable commodity.

America is for sale.

dageshi4• 11 years ago

Companies, individuals, investors e.t.c. are moving their money out of the yuan back into the dollar, China is selling some of its treasuries to get the dollars to give to these people. I expect the vast majority of it is leaving the country.

beauzero5• 11 years ago

this.

ars• 11 years ago

Isn't that against their goal of making the Yuan part of the Special drawing rights? If there are fewer Yuan internationally (and more in-country) they have a worse case for that.

Elrac3• 11 years ago

This article necessarily has a lot of business jargon content, and I'm having trouble parsing it. Could somebody with subject knowledge please summarize the article in terms a simple hacker can understand, and speculate a bit on the possible ramifications?

CmonDev• 11 years ago

A bunch of numbers stored on different servers will change. No ramifications for non-wealthy people.

leereeves2• 11 years ago

The state of China's economy (of which this action is a small part) has a lot of ramifications.

dekhn2• 11 years ago

Treasuries are securities that the US government sells. It's a piece of paper you can buy, that promises the US government will pay you back, with interest (simplification) at some point in the future.

People with spare cash (which goes down in value over time) can put their money into Treasuries, with a very high expectation they'll get some some interest over their invested principle. US Treasuries are considered a very good "stable" investment in that the risk of not getting back your interest or principal is very very low.

China bought a lot of these when they had lots of spare cash. These things involve so much money and are integrated in the US monetary system that rapid changes of their ownership can have big impact in US economy (world's largest) as well as large markets (big simplification; there is a bunch of macroeconomic theory, as well as a bunch of irrational behavior that causes shifts in markets).

By selling these, the supply of treasuries will go up, which will probably reduce their value, which will have ripple-through effects on the economy.

Beyond that it's truly hard to evaluate the specific ramifications. The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally.

msandford4• 11 years ago

The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally.

I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational.

But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate.

Or in the case of China, they want to defend their currency peg. You might disagree with their decision to peg, but if you accept for a moment that this is their goal, then it's super rational.

jazzyk3• 11 years ago

This could have serious implications for the US. Here is why:

With a lot of supply, the price of treasuries will go down, so the US government will be forced to offer higher yields for the newly issued debt to sell. This will:

- increase the servicing cost of the $19T debt (will cause the debt to increase even faster).

- cause a drop in the stock market, as more cautious investors (retirees, etc), enticed by increased yields, reduce their stock market exposure

It all depends on how many treasuries China wants to sell.

_superposition_• 11 years ago

Actually, China didn't have much choice BUT to buy US Treasuries with their current account surplus. Investopedia has a good overview of the dynamic here: http://www.investopedia.com/articles/investing/040115/reason...

Plenty of links from there to get you acquainted with the terminology.

inspectahdeck• 11 years ago

China owns a ton of US treasuries. It will sell some of those in exchange for dollars. It will then buy it's own currency, the Yuan, with those dollars.

Selling treasuries will make US bond prices go down.

Buying Yuan will increase it's price versus the dollar.

So, this is a move by China to prop up the value of it's currency.

beauzero5• 11 years ago

...correct in a normal world. China is not normal. Their currency is pegged to the dollar. They are trying to decouple (see IMF comments delaying their inclusion for another year). They are lowering the peg which is increasing the dollar vs. ren. This in effect is lowering/devaluing the ren. which makes manufacturing cheaper there. Other emerging markets are also decoupling so that they can devalue their currency in order to keep up with the Chinese active devaluation. Currently other major markets Germany, Japan, etc. are not actively devaluing. If they do we will have a currency war. This would be very very bad.

...this article is only describing one aspect of a very complex picture right now. One that you could argue has not been seen previously. That and the weird illiquidity problem that happened Monday with ETFs. It makes for a very odd picture right now.

jpollock• 11 years ago

Interest rates are determined as the inverse of the bond rate. I have no idea how accurate this is, but here's my thinking...

So:

1 selling bonds (treasuries) will lower the price of the bond (supply/demand).

2 This will increase the effective interest rate - (face value - price paid)/face value / years for simple straight line rate.

3 The higher interest rate will cause more money to flow towards that currency (USD)

4 That will result in the USD appreciating against all other currencies

5 China then uses the proceeds to buy Renminbi, driving it up against the USD

6 That USD->Renminbi sale might result in a drop in USD because there will be more USD around?

7 If enough bonds are sold, this might have the same effect as a Fed increase?

8 An increase in the value of the USD will keep manufacturing jobs from coming back to the US

9 Oil prices will drop in USD (?)

10 China might have a UK vs Sorros moment [1]

[1] https://en.wikipedia.org/wiki/Black_Wednesday

misja111• 11 years ago

Point 1 is correct, the selling of bonds by China will have the effect that their prices will drop. That's the law of supply and demand in action.

Point 2 will probably also happen; but only up to a limited amount, because:

Point 3, and the others, won't happen. There will not flow more money towards the USD. What happens now is the opposite; China is selling USD's. Again because of the law of supply and demand, this will lead to a drop of the USD rate. If the drop will be too much for the FED's taste they will increase the interest rate (point 2), but only so much that the depreciation will stop.

RaSoJo2• 11 years ago

Thanks for this. I look forward to more answers on the questions you highlighted in this thread. One additional question I have now is, what about the impending Fed Rate Hike? As in your point 7 - if the China Govt. action is equivalent to a rate hike, then will the Fed's own hike get pushed further into 2016?

jazzyk3• 11 years ago

Excellent list. Two additional impact points (see my other post somewhere above in this topic)

- the stock market may drop

- negative impact on government debt ($19T and counting)

lmm3• 11 years ago

1. True

2. True

3. A little, perhaps - demand is somewhat elastic (although treasuries are weird). But the economy is damped rather than chaotically oscillating; the amount of money flowing into USD that way will be less than the amount that China's pulled out. You may be missing the point that treasuries are pretty much equivalent to USD; China isn't selling the treasuries for USD, they're selling them for RMB. The effect on treasuries and USD will be pretty much the same.

4. Again, less than the amount it depreciates.

5. They might continue, or they might not.

6. Yes

7. Yes

8. There's not going to be an increase, there's going to be a decrease.

9. Likewise, oil prices will rise

10. Maybe. The thing is, Sorros was right; fundamentally, UK manufacturing was less competitive than German, and the price needed to adjust to reflect that. This move is, at least partly, China brassily saying that their companies are still up to snuff, and will outcompete those in the US (something that a lot of people are a lot less confident in than they were a week ago, if you go by Shanghai stock exchange prices). Are you sure they're bluffing?

The other part is that Sorros had more money than the British government. A modern-day equivalent would have to put their hands on more money than China's total US treasury holdings - $1.2 trillion. Bridgewater, the largest hedge fund firm, has $78 billion. They could probably lever that up a bit, but betting the whole firm at 14:1 ?

ArikBe• 11 years ago

China holds US debt treasuries.

China sells US debt treasuries in exchange for dollars.

China sells the dollars it raised to buy Yuan.

Demand for the Yuan increases, hence the Yuan becomes more valuable, hence its exchange rate vis-a-vis the dollar appreciates (it will also appreciate vis-a-vis other currencies).

Dollars are being dumped into the market, so the dollar should decrease in value.

A more valuable Yuan means that China's currency is more expensive, hence its exports become more expensive (and drop) and its imports become cheaper (and rise).

Other people now own US debt, for which they will receive interest payments and a repayment when the debt is due.

RockyMcNuts2• 11 years ago

More like, there is capital flight from China because there are economic problems and yuan devaluation is anticipated.

When people liquidate yuan assets and buy overseas assets, they sell yuan to the central bank, buy foreign currency.

In order to buy the yuan, China's central bank needs to supply foreign currency. To acquire the foreign currency, they sell foreign assets, e.g. Treasurys.

It's not so much they are trying to push the yuan up, as trying to prevent it from falling too precipitously as people sell it.

They are accommodating the capital flight by supplying foreign assets, instead of letting the yuan fall sufficiently sharply to the point that would stop capital flight, because investors would no longer expect further depreciation.

jussij• 11 years ago

In terms of supply and demand what you say makes sense, but:

China sells the dollars it raised to buy Yuan.

The Yuan is a highly controlled currency that does not behave like other normal free market, floating currencies.

The Chinese government sets the exchange rate as was shown just weeks ago when they devalued the Yuan and Trump call that move the start of a China/USA currency war.

Demand for the Yuan increases, hence the Yuan becomes more valuable

If the Yuan was free floating that might be true, but even then, since China is a net exporting nation they want a low Yuan, so that their exports are cheaper and their imports are more expensive. So why would they want to drive up the Yuan?

I'm really not sure what is going on but everything they are doing (i.e. selling US bonds) goes against what one would expect.

The only thing I can think of, because of the turmoil in China (i.e. the share market shock, property bubbles etc) they are a bit short of cash and rather than print money (which would causes inflation) they are raising money by selling some of their US bonds.

URSpider945• 11 years ago

For years, China has been selling its own currency (RMB) and buying USD. This has the effect of depressing the value of RMB vs the dollar, since it puts more RMB into the market and removes dollars. It takes the dollars it owns and buys US Treasury debt. China wanted to keep the RMB artificially low to keep Chinese goods affordable in export markets, which keeps the economy growing. They didn't completely cancel out increases in exchange rate, instead they were managing it to be a slow rise over years.

Now that the China economy has started slowing, the RMB has actually started dropping in price vs the dollar. Although good for trade, this is panicking the markets, who expect stability or a slight increase. So, the government is reversing the flow, selling treasuries, selling the dollars, and buying RMB. This is called "unwinding" the position.

This unwinding has its own effect on the U.S. markets -- it's going to tend to drive down the price of treasuries, which will INCREASE their effective interest rate. Higher interest rates in the U.S. might threaten the economic recovery -- the Fed has been trying to keep rates low for the past 7 years or so.

gjm11• 11 years ago

I don't think I believe your last paragraph.

It's certainly true that when predicted interest rates go up, existing bonds (which have fixed yields built into them) become less attractive and their prices go down.

So it's certainly true that decreasing bond prices can be indicative of higher future interest rates.

But if bond prices are decreasing only because the Chinese government is unwinding its position in Treasuries, surely that doesn't apply.

Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01.

Perhaps there's some subtle way for these artificially decreasing bond prices to cause higher interest rates in the future? I'm not seeing it, but I'm not an expert in finance or economics...

drcode• 11 years ago

I can summarize it in one word for you: INFLATION.

This will indirectly cause large amounts of US currency to hit the world markets, and the Chinese are going to stop vacuuming up all our excess USD.

benjaminl• 11 years ago

China has their currency, the renminbi (RMB), pegged to the US dollar. Since the Chinese economy has been weakening and their stock market has been plunging, people have been pulling money out of the renminbi, this has put downward pressure on the renminbi.

Now China has acquired vest foreign exchange reserves, mainly in the form of treasury bills, over the years. This was a result of pegging the renminbi to a rate that was artificially to low. Now that people are pulling money out of China, the renminbi might actually be too high.

China has had to user its reserves to prop up both the price of its currency and their stock market, to do this they have had to use their foreign exchange reserves. In one estimate, China has already spent $400 billion propping up the stock market and their currency. (http://www.ft.com/intl/cms/s/0/521f9f12-4a56-11e5-b558-8a972...) To do this China needs to sell some of it treasury bills.

This will have the effect of a minor increasing in the interest rate the federal government has to pay to borrow. While the Federal Reserve has been keeping rates low, it has been signaling for a while that it wants to increase interest rates. So this actually would be in line the Federal Reserve’s monetary policy.

In this end the selling of these treasures will have very little effect on the Unites States or the world wide economy. The big worry is that China might be slipping into recession. As the second largest economy, and the generator of most of the world growth, a Chinese recession would be a huge drag on the world wide economy.

AJ007• 11 years ago

Vote up.

It is critical to understand how the balance of payments works with regards to international trade to explain what is going on.

We can already see the impact China's slowdown has had in the price of raw materials. The massive drop in luxury goods consumption & Macau gambling revenue has been attributed by the press to Xi Jinping's corruption crackdown. I didn't buy that explanation. It is plausible that the economic engine which carried them for the past 20 years ran out of steam a while ago.

Contractions are good, for both public economies and private companies. They force the removal of waste and expose accounting frauds. The big question now is how much of China's economy is dependent on questionable things? Perhaps outright fraud, maybe business models that work only during sustained growth, or just stuff that requires the continued successful implementation of particular government policies (subsidizing interest rates, keeping exchange rates low.)

snake_plissken• 11 years ago

China's currency and it's exchange rate is managed by The People's Central Bank of China. It is not allowed to freely float in value in response to supply and demand for it. However, it is allowed more up or down each day within a set amount, before the People's Central Bank of China will intervene, and in actuality many times the PBOC just does whatever it wants to do it.

Which brings us to a few weeks ago, when overnight the PBOC decided Yuans would be worth about 2% less than the day before. The PBOC also expanded that daily trading band to 4% a day. They did this in an apparent attempt to increase exports, as Chinese goods, on paper, became Cheaper overnight, at least in terms of USD.

In response to this, there has been downward pressure on the Yuan and now the PBOC, wary about capital flight among other things, needs to defend the Yuan by selling US Treasuries, for which they get US Dollars, with which they buy Yuan on the open market, decreasing the supply of Yuan available, which puts upward pressure on its value.

The biggest ramification, I would say, has to do with interest rates on US Treasuries, which influence all types of other debt instruments such as home loans, and of which China has been a huge buyer over the past decade and a half. The interest rate on a 10 Year Note is dictated by how much demand there is for the note. If a lot of people want the note, you can get away with offering a lower interest rate, but if few people want to buy it, you need to increase the rate to attract more buyers.

Spooky232• 11 years ago

China is selling US Debt, so more dollars are on the market.

Since we've been keeping interest rates at zero for some time for political purposes, we lack a lot of controls (ie. interest rates adjustments) to smooth out whatever fallout takes place.

The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks. As a citizen, the impact varies based on your position. If you refinanced your house with a 30-year fixed, you're good. If you're on a interest-only ARM, not good.

dragonwriter6• 11 years ago

The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks.

There are more effects on the general economy than just the negative impact on the stock market (the direct stock market is one of many direct manifestation of the diversion of investment dollars into Treasuries instead of other investments as Treasury yields increase); upward pressure on interest rates -- that is, an increase in the market-clearing cost of financing given the same demand for financing -- means less financing happens, and thus less of the economic activity dependent on that financing happens, and there is a general economic slowdown, job losses, etc.

ChuckMcM• 11 years ago

China informed the US that its going to be selling its treasury notes (for dollars) so that that it can buy back renminbi (its currency) in dollars to increase the value of the renminbi versus the dollar. With any other asset this would be a sort of 'who cares', however the US finances its own government debt by selling treasuries and having two sellers on the market means that you start competing for buyers, and you compete by selling them at a discount (which raises their effective interest rate).

What that means then is that even though the Federal Reserve is interested in keeping interest rates down, you can see interest rates of treasuries can be pushed up, and for the US, selling new treasuries to finance the deficit will pay more interest (causing the deficit to be that much worse) and that can also push interest rates up.

Bottom line, China did the right thing by letting the US know they are pursuing this strategy in order for the Federal Reserve to continue to manage its own economic policy.

myth_buster2• 11 years ago

  “Strategically, it probably has been China’s intention to find the right time 
  to lighten up its excessive accumulation of U.S. Treasuries,” he said.

I think that is the crux of it. They are itching to move away from dollar and any excuse to do so is used. This has also been tied with AIIB & they accumulating a large amount of gold to back up their currency to be the base denomination for global trade.

deathhand3• 11 years ago

I am sure current crude prices also help.

blumkvist• 11 years ago

You've been reading way too much "falling of the petrodollar" blogs.

myth_buster2• 11 years ago

Guilty as charged. I've Currency Wars [0] in my reading list.

[0] http://www.amazon.com/Currency-Wars-Making-Global-Crisis/dp/...

norea-armozel3• 11 years ago

Is there any economist blogging about this move yet? My question is what are the possible outcomes of this sale for the economy as a whole?

001sky3• 11 years ago

lowering demand for us paper means higher interest rates. higher interest rates in the us means devaluation of foreign (non us currency), all other things equal.

us is going to slow gdp when interest rates go up (look at fed...they are scared). so this is basically a stealth currency deval and a shot accross the bow to obama (sitting admin will take the hit if gdp in us goes south).

typically, this is crytpic and below the radar type of stuff but almost certainly is meant to broadcast a message.

just my $0.02.

norea-armozel3• 11 years ago

I don't think China has much of a choice to be honest. They're still not able to get a Chinese middle class to buy goods made at home at the rate they want. So, I think their economic program of being the world's factory floor has been a failure so far. They (Chinese Community Party) really need to rethink their strategy and look towards other methods of improving the living standard because it just doesn't look like their brand of market socialism is working (I'm using the term market social very loosely here).

adeptima2• 11 years ago

What Would Happen If Everyone Joins China In Dumping Treasurys? ttp://www.zerohedge.com/news/2015-08-26/what-would-happen-if-everyone-joins-china-dumping-treasurys

001sky3• 11 years ago

this is a double post of your own post https://news.ycombinator.com/reply?id=10129397

adeptima2• 11 years ago

What Would Happen If Everyone Joins China In Dumping Treasurys? http://www.zerohedge.com/news/2015-08-26/what-would-happen-i...

tptacek• 11 years ago

Can someone provide a bad-case source that isn't from ZeroHedge?

ath0• 11 years ago

And maybe also not written by someone named "Tyler Durden"?

mikeyouse• 11 years ago

Izabella Kaminska writes some pretty good China posts for the Financial Times, her Twitter is worth a follow;

https://twitter.com/izakaminska

But the best round-up of China lately I've seen is from Christopher Balding, a professor in Peking University's business school:

http://www.baldingsworld.com/2015/08/14/end-of-week-thoughts...

Basically, a lot of wait and see, but China's headline reserves aren't nearly as impressive as they sound and things could get interesting if they lose much more value.

jakozaur• 11 years ago

Federal Bank already owns more USA debt than any other country: https://www.nationalpriorities.org/campaigns/us-federal-debt...

http://qz.com/384232/guess-who-holds-even-more-us-debt-than-...

At worst Federal Bank will need to print more money (as know as quantitive easing) and buy more treasuries from the government.

beauzero5• 11 years ago

yes...this. there is an argument that we are balanced on a knifes edge right now. if the fed goes by their previous metrics, today's growth numbers would indicate that a September hike is back on the table. if they are worried about treasury sales from china increasing we may have another round of quantitative easing. this is why the market is so sketchy right now. nobody knows what is going to happen because they are almost exact opposite directions to take.

debacle• 11 years ago

Why would we counter inflation from China with QE?

at-fates-hands• 11 years ago

I guess the big story here is that people have been warning they would do this voluntarily in some attempt to punish the US and drive down the value of the yuan and drive up the interests rates so they can continue to undercut US businesses.

The fact they have been forced to do this is another scenario all together. This brings up an important question: What happens when the bidders who are absorbing all this paper, stop bidding? Then what does the Fed with all this paper in a highly liquid market?

Make no mistake though, this is the game the Chinese like to play with their currency in order to keep the value of the dollar high and the yuan low. Back in early 2015, they did the same thing:

http://www.breitbart.com/national-security/2015/02/19/trade-...

Federal Reserve data published late on February 18 reveals China dumped about $75 billion in US bonds in the last six months of 2014

Breitbart broke the story last week that China’s real economic growth had crashed to 1.7% in the fourth quarter of 2014. We also warned last August that China appeared ready dump part of its $1.32 trillion holdings of US bonds in a scheme to drive American interest rates up; thereby strengthening the dollar and devaluing the Chinese currency.

hiou• 11 years ago

I think we just learned what that stock market drop in the US was about.

hodwik• 11 years ago

The drop in the US stock market this week was because of massive drops in the Chinese stock market (and secondary drops in the EU stock market).

Compare the 1 month view of the Chinese market (http://www.bloomberg.com/quote/SHCOMP:IND) to Nasdaq (http://www.bloomberg.com/quote/CCMP:IND), and then recall that the Chinese market closes 7 hours before the US market opens.

Bostonian• 11 years ago

There is no upward trend in 10-year Treasury yields, which are currently low at about 2.2% -- see http://finance.yahoo.com/q/hp?s=%5ETNX+Historical+Prices .

po2• 11 years ago

People seem to think this is a problem for the US (and I suppose it sort of is) but may not realize that it's not rosey for China either. The article ends by implying that they want to be doing this to get rid of much of their reserves, but I'm not sure it's that clear. The title here about China 'warning Washington' could be read either as a head's up or as a threat.

The problem for China is that by selling treasuries for USD and then using that USD to buy yuan, they are effectively taking that money out of circulation. This keeps the yuan from dropping and maintains the currency peg but it also removes all of the liquidity in the market. This is not really a great situation. It also makes US manufacturing more competitive.

In the past few days, they have been talking about playing with the reserve-requirement ratio of banks to encourage them to dump money into the market to maintain liquidity. If you tell banks that they can 'officially' lend out more by lowering the required amount of money they must have on hand, they will and then real money has been created.

I feel like they're really just trying to keep the whole thing on the road.

go1979• 11 years ago

I am so confused ... don't the Chinese want a devalued Yuan? It helps their economy, right?

Did they shift course in the past week???

irln2• 11 years ago

I believe when they decided to devalue their currency it impacted their stock market and unfortunately all central banks are now beholden to their individual equity markets and therefore "had" to take action.

po2• 11 years ago

Yeah it's confusing... You're right that a devalued Yuan helps their exporters. Of course, too much is a bad thing too. They want to keep their currency within a narrow range relative to the USD. They were recently making a move to do that which sparked all of those 'currency war' headlines:

http://www.wsj.com/articles/china-moves-to-devalue-the-yuan-...

They did that as a 'one-off thing' but it seems like everyone interpreted it to mean their economy was actually really in bad shape so investors started to get out before their assets dropped more. Then the stock market went to hell and now they're surprised that everyone is spooked:

http://www.reuters.com/article/2015/08/27/us-china-yuan-idUS...

So basically they sparked a bit of a panic and have been throwing levers to try to reassure everyone but each thing they try seems to just make it worse.

At least that's what I'm seeing. :-)

analyst74• 11 years ago

You need to take news reporting with a grain of salt, just because all news papers say something doesn't mean that something is true.

There is some truth in lower Yuan helps export, and the Chinese government probably kept that in mind. But I think their main priority is to maintain the status quo, and keep things stable, for the past 15 years or so.

hackuser• 11 years ago

don't the Chinese want a devalued Yuan? It helps their economy, right?

It helps some and hurts others. It helps when you are exporting and hurts when you are importing. But it gets complicated:

Among the 'importers' are consumers. Devaluing the yuan raises prices for imported goods and services, and goods containing imported components. In a way, devaluation taxes consumers to help exporting businesses (but it's more complex: some consumers work for or otherwise do business with exporters, while some are connected similarly to importers).

Also among the importers are businesses who import components of the products they make, including goods, software, and services. Those importers just saw an across-the-board increase in their costs.

And there is import and export of debt. Those who owe money in another currency, usually US dollars, just saw an across-the-board increase in how much they owe. Those who are creditors in another currency just got an across-the-board bonus; however I suspect that most Chinese institutions would lend in their own currency. It also helps those importing assets; for example investors are more likely to put their money in China when they can buy yuan-denominated assets more cheaply.

In a free-floating currency and open market, exchange rates also affect domestic interest rates because the exchange rates affect demand by foreign investors. I'm not sure how China's market works in that regard.

In the end it's the government picking winners and losers, but if their economy or key sectors depend more heavily on exports than imports, certainly they could see a net gain.

wisty• 11 years ago

They devalued the yuan a bit, and probably want to keep it where it is now.

China runs partly on low interest rates on deposits. That means savers are effectively subsidising loans to businesses. Chinese savers are already looking for other places to park their savings (stocks, real estate, offshore), and China doesn't want to add more inflation as another reason to withdraw from banks.

I guess they figure that buying and selling US bonds is a way to control their target exchange rate (which they probably want to keep fairly stable) without messing other variables up too much, because the global market for bonds can soak it up.

afiedler• 11 years ago

The title about 'warning Washington' is almost certainly a heads up and not a threat. The Treasury needs to understand market dynamics to have smooth auctions for new treasuries, which is in everyone's interest. Prime dealers (the big banks that deal in treasuries) give the Treasury a heads up about these things, so would be natural for China to do so.

fspeech• 11 years ago

The PBoC has the ability to issue Yuan against any assets they fancy. The is little constraint on Yuan liquity from selling dollars.

roymurdock7• 11 years ago

Summary & Speculation:

China sells US treasuries in order to appreciate Yuan relative to USD.

Supply of US treasuries on the market increases.

Demand for US treasuries decreases due to concerns over a large enough Chinese sell-off. Demand for US treasuries increases due to uncertainty over the stock market. Net effect on demand is uncertain.

Assuming worst-case scenario (for the US) in which supply of US treasuries increases and demand decreases: Yields on US treasuries increase as investors with less demand must be compensated for taking on a riskier and more plentiful asset.

Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line.

Bottom line: This probably won't have an effect on US economy as investors need somewhere to park their money that is not the stock market. Also, the scale at which China is selling off treasuries is assumed to be pretty small ($40bn/mo compared to $3.65tn total holdings).

Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB.

jasonlaramburu• 11 years ago

How do you draw the bottom line conclusion (no effect on US economy) from the scenario where U.S. growth and economic activity are stifled?

space_fountain• 11 years ago

He's saying that could happen, but it's unlikely

roymurdock7• 11 years ago

The worst-case scenario (large drop in demand coupled with large increase in supply of US treasuries) would probably only be triggered if China dumped a lot of treasuries on the market at once. Say, for argument's sake, 50% of their holdings in one week. This would signal US treasury weakness and would flood the market with a ton of extra US treasuries.

They are currently selling treasuries off at the rate of ~1% of their total holdings per month. So I assume that fear over an uncertain stock market + investors looking for a good opportunity to pick up cheap US treasuries will provide enough demand to soak up the new supply of treasuries that are trickling into the market.

6stringmerc• 11 years ago

I think one of the expected consequences of such uncertainty is the Federal Reserve fires up the printing presses and dive right in to QE4. Just a thought.

irln2• 11 years ago

Given the fed's 4.5 Trillion dollar balance sheet[1] and paying 25 basis points for excess reserves [2] while getting 33 basis points on 1 year or more treasuries [3] I'm not sure I don't see any "US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line."

[1] https://research.stlouisfed.org/fred2/series/WALCL

[2]http://www.federalreserve.gov/monetarypolicy/reqresbalances....

[3]http://www.treasury.gov/resource-center/data-chart-center/in...

dataker2• 11 years ago

Now, what if other countries, especially emerging markets, followed the same pattern?

It would probably not be harmless.

dredmorbius• 11 years ago

China's Treasury holdings dwarf all but a few nations, and it's by far the largest holder, excluding Japan which tails only slightly. "Carribean Banking Centers", oil exporters, and Brazil follow, the last with only just over a quarter of China's holdings. Few emerging countries have any significant holdings.

http://www.treasury.gov/ticdata/Publish/mfh.txt

Kinnard2• 11 years ago

#bitcoin

JamesBarney7• 11 years ago

I'm not sure how this causes yields to rise. The short term interest rate is determined by the FED. If China sells off enough treasuries that the interest rate on them jumps to 1.0% then the FED will probably just buy more treasuries until the interest rate hits the zero lower bound again at 0% interest. This would stimulate the economy.

ams6110• 11 years ago

Bond yields and prices are inversely related.

Prices fall, yields rise.

roymurdock7• 11 years ago

Correct, the Fed determines short term interest rate through Federal Funds Rate (FFR).

The treasury instruments we are discussing here are mainly 5-10 year notes and bonds. Thus the yields on these instruments reflect long term interest rates. The market, not the Fed, determines long term interest rates.

Check out this graph:

https://research.stlouisfed.org/fred2/graph/?g=1HPC

The long-term interest rate used to be much more closely correlated with the FFR. We see that it has decoupled significantly during the past 10 years and is now moving somewhat independently of the FFR. The Fed is stuck at the lower 0 bound and has no power over long term interest rates anymore. Janet Yellen has noted this publicly herself. [1]

What you are describing - the Fed purchase of more long-term US treasuries - is another wave of Quantitative Easing. The problem with QE is that, while it gives the financial system more liquidity, that liquidity has not passed on to the end consumers. So the Fed would be adding (potentially overpriced) liabilities to its already massive pile of debt in order to have a somewhat negligible effect on long-term interest rates, and to probably have no effect whatsoever on economic activity within the US. In short, it would be taking on more risk for relatively little reward.

I highly recommend this reading: http://www.heritage.org/research/reports/2014/08/quantitativ...

[1] http://dailysignal.com/2014/07/11/fed-vice-chair-mark/

vilhelm_s• 11 years ago

Expecting that selling bonds would affect the bond yields is such a quaint, pre-2008 notion. :)

crpatino• 11 years ago

I am not sure that 1% per month is small enough to claim that "probably won't have an effect on US economy". If it were a one off event, sure. But at the end of day the question is: for how long can these advances can be sustained?

At the very least, this will prevent US to capitalize on world wide instability by taking on more debt. I wonder if that is the purpose of the Chinese.

strasser• 11 years ago

"US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line."

How does the American governments NOT spending money stifle growth?

dragonwriter6• 11 years ago

How does the American governments NOT spending money stifle growth?

The same way any other market participant (or set of market participants) not spending the same amount of money reduces growth compared to what it would be if they did.

Activity that isn't happening in the economy is directly a reduction in the size of the economy.

URSpider945• 11 years ago

The US government not spending money looks like:

-- Hiring freezes, or even furloughs or layoffs -- Delays in capital projects (new buildings, bridges, airports)

This means less money in the pockets of employees, as well as less money to contractors, who have less money to pay their employees and suppliers, and so on. If people have less money, then they can't spend as much money, and thus the economy grows less fast, or stops growing.

exelius6• 11 years ago

Government spending on capital projects generally causes an increase in economic activity. The government initiates economic activity, which causes companies to hire more workers, invest in new equipment, purchase supplies, etc. That all eventually makes its way into peoples' pockets, where they spend the money and throw it back into the economy. Capital projects tend to have an outsized impact because much of the economic activity required to build them wouldn't be practical to source from outside the US (you would never buy concrete from China, for example).

Furthermore, assuming the capital projects filled a gap in the economy, they may make it easier to do business such that companies can operate with reduced costs relative to global competition. That would be a secondary effect from having improved infrastructure, but it would be much longer-lasting than the primary effects.

ancap• 11 years ago

In theory the government would have to reallocate money from something else in order to pay a higher interest rate. Thus they are not really spending any less. In practice the Federal Reserve takes up some of the burden by buying up Treasuries.

You're general idea, though, is correct. Government spending is a burden on the economy. It reallocates resources away from the market. The main metric which is supposed to measure the health of an economy, GDP, is faulty in part because it includes government spending.

roymurdock7• 11 years ago

Think about it in terms of investment.

Did you go to college? If so, you spent a lot of money in order to grow your future earnings. You invested in yourself.

The government needs to spend on education, healthcare, R&D, infrastructure, etc. in order to grow future income.

logfromblammo2• 11 years ago

You typically have to be a Keynesian (or related school of economics) to believe that.

Governments get their spending cash from taxation and political control of the monetary authority. In order to exert economic influence, they first have to take some away from the actual producers of marketable goods and services. Thanks to the way money works, if they don't expand the amount of currency in circulation by spending what they created by fiat, the value remains with the producers, who continue measuring their prices by the smaller amount in circulation. In metaphorical terms, no one can listen to what you want to say if you do not speak.

The one and only way that government spending can produce more growth than ordinary individual spending is by ordering construction or repair of capital infrastructure that benefits multiple businesses who would individually be unable to justify the expense of the improvement.

Business A and business B are competitors, and they would both benefit from roads that connect them to a highway network. A is unwilling to assume the expense of building a road to the highway unless A could exclude B from it. B feels the same way about A. If either notices the other building a road, they know that money is not available for other purposes, so whoever makes the first move could lose market share thanks to a strategic counter-move. Instead, government G takes somewhat less than the full amount needed for one road from each, to build a single public road that serves both equally. Both businesses get their road to the highway, but neither had to pay the full expense individually. Growth occurs by breaking the Nash equilibrium that was preventing it.

That's the ideal case. Usually, government spending is no smarter than handing a wad of cash to the village idiot, so it has no greater effect on growth than ordinary consumer spending, minus the deadweight loss. Also, if G takes a full road's worth of economic influence or more from both A and B, and builds only one complete road or just a partial road with it, neither A nor B is any better off. In order to promote growth, the government spending has to buy something of actual value to the public, at a lower cost than the sum of costs that individuals would pay for the bits of the "something" that benefit each of them most.

The public usefulness of a "something" is often a matter of opinion, so the "growth" thing is almost pointless to argue about.

spikels3• 11 years ago

Growth is just change in total spending (= total selling). Less spending by one of the biggest spenders means less growth. The is the essence of "fiscal policy"[1]. Of course much of this is offset by the the need to fund this spending through borrowing, taxes or printing money (i.e. inflation) - at least eventually.

[1] https://en.m.wikipedia.org/wiki/Fiscal_policy

spinlock• 11 years ago

What I don't get is how this jives with debasing the Yuan. Won't selling Treasuries create demand for Yuan and drive up the Yuan price? Maybe They are selling Treasuries for another currency?

exelius6• 11 years ago

They are probably selling treasuries for dollars and adding them to their foreign currency holdings. Also, China can just print more Yuan if they want to debase it (they're a government; they can do that). Whether they keep the dollars as dollars is dependent on whether or not they think the dollar will rise in value relative to other currencies: it's just investment strategy at that point.

lmm3• 11 years ago

It will drive up the price of the Yuan - that's what the grandparent said. I don't know where you're getting debasing from?

Separately the Chinese government recently allowed the Yuan to float more openly. That's had the effect of debasing it, but it wasn't a goal - the point is to allow it to float at a market price (partly to make it more viable as a reserve currency), but the government wants to prop up its value.

washedup• 11 years ago

Great summary.

exelius6• 11 years ago

Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB.

Offloading foreign currency holdings in a mass sell-off is not something China would WANT to do -- it would end up destabilizing the Chinese economy more than the US economy. Not even as an economic warfare tactic: the global economy is dependent on cheap US money, and messing with that would set off a global recession that would hit an emerging superpower like China especially hard.

I think you're right and China is just looking to rebalance its currency by drawing the dollar down a bit. That's not the worst idea in the world (either for China or for the US) and they're doing it right around the time the Fed was planning to raise rates anyway. I think the market is already spooked enough by the troubles in China that it would probably welcome a rate increase (for the reasons you listed above).

jsn117• 11 years ago

I think you're right and China is just looking to rebalance its currency by drawing the dollar down a bit.

In prep for having the Yuan as a global reserve currency.

macspoofing• 11 years ago

the global economy is dependent on cheap US money

Keep saying it and you may end up believing it.

DominikR2• 11 years ago

Offloading foreign currency holdings in a mass sell-off is not something China would WANT to do

I'm sure China is not only guided by purely economic considerations here. They might already consider the possibility that China/Russia will soon be in a war with the US.

It might make sense here to take an economic hit to bankrupt the US (or at least threaten it) to prevent an active military confrontation.

Not even as an economic warfare tactic: the global economy is dependent on cheap US money, and messing with that would set off a global recession that would hit an emerging superpower like China especially hard.

People will suffer when countries engage in economic warfare and even more so if they engage in war. This has never held off a country escalating from economic tensions up to military actions.

If China deems this is necessary because it is the best choice they have, they will certainly do it no matter what.

beauzero5• 11 years ago

The big 1.6T question is who is buying them? Right now it looks like they are going to Belgium?

adventured• 11 years ago

The Belgium buys are now famous for being a China proxy. It's not actually Belgium doing the buying.

http://www.bloomberg.com/news/articles/2014-07-27/china-hide...

coliveira• 11 years ago

When it comes to currencies, supply has not such a powerful effect as people think. The value of a currency is determined more by the subjective ability of the government to support the currency, not by the amount of it in circulation. If supply had such importance, large countries like Russia, China, and India would have a great advantage over the USA, because their currencies are currently not in wide circulation. In theory, the US could continue printing money until everybody in the world would be using USD (now, if this would or should happen is another thing).

JamesBarney7• 11 years ago

What happens to the dollar?

For years people railed against China for keeping the yuan artificially lowered by buying U.S. Treasury Bonds. This led to Chinese manufacturing being extra competitive, and a larger U.S. trade deficit.

Now China is doing the opposite. It is selling treasury bonds to buy yuan to artificially increase the price the yuan and everyone is freaking out. It will do the opposite of what is had been doing by causing the dollar to appreciate, and the yuan to depreciate. This will make foreign goods relatively more expensive for Americans, and American goods relatively cheaper for the foreigners. This effect will be most pronounced when the foreigners are Chinese. These will probably be small effects that won't effect anyone's life enough to be noticed.

Whats happens to Treasuries?

Nothing. Short term treasury rates are pretty much determined by the FED. Now even more so than usual because of the FED has it's pedal all the way down on the accelerator at 0% interest. Long term treasury rates tend to be determined what people think short terms rates will be over the long term. What primarily determines the interest rate over the long term is U.S. growth and inflation. So if people think this will cause more U.S. growth, long term treasury rates might increase a little.

dataker2• 11 years ago

For having an idea on numbers/countries, these are good references:

http://www.treasury.gov/ticdata/Publish/mfh.txt

http://www.treasury.gov/ticdata/Publish/mfhhis01.txt

mactitan• 11 years ago

Note the title is opposite of what they recently did.

Selling treasuries has large ramifications for the US. and a warning that we should think about getting our financial house in order (congress will not heed this, only the bond traders will force "austerity" as they did during the Carter administration) China's 2% devaluation of the renminbi a couple weeks ago was the trigger for the current market turmoil.

Chinese financial tactics are probably aligned with the goal of inclusion into the IMF SDR: <IMF Executive Board Approves Extension of Current SDR Currency Basket Until September 30, 2016> http://www.imf.org/external/np/sec/pr/2015/pr15384.htm (Was it retribution for not being immediately included? Maybe not, but they still are the major holder of US treasuries.)

Then they wouldn't need as many dollars to buy their trade goods. Chinese rise is inevitable and we need to do serious things to prepare for living beyond our means.

klean92• 11 years ago

Will George Soros enter the fray and break the Bank of China? ;)

foobarian• 11 years ago

Watch out for Porsche proxy-buying all the freed up treasuries!

known• 11 years ago

Dollar is pegged to OPEC oil; Yuan is pegged to exports;

China Sells U.S. Treasuries to Support Yuan

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