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. Ten-year Treasuries pared gains and two-year notes erased an earlier advance.
The People’s Bank of China has been offloading dollars and buying yuan to stabilize the exchange rate following the Aug. 11 devaluation. The nation’s foreign-exchange reserves, the world’s largest, dropped $315 billion in the last 12 months to $3.65 trillion. The 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.
“Recently, the foreign-currency reserves may have been used up rapidly,” said Xu Gao, chief economist at Everbright Securities Co. in Beijing. “The market hasn’t formed a stable expectation for the currency. As long as the PBOC keeps the rate stable, that pressure will gradually ease off. This is the time with the most pressure.”
‘China Selling’
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 ????”.
The 10-year Treasury yield was one basis point lower for the day at 2.16 percent as of 8:46 a.m. in London, after dropping as much as three basis points. The two-year was little changed at 0.67 percent, after falling two basis points.
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.”
Yuan Stabilizes
The currency rose 0.08 percent to 6.4053 per dollar on Thursday in Shanghai, trimming this month’s decline to 3.1 percent. Daily fluctuations have averaged less than 0.1 percent in the past two weeks as China’s central bank intervened to limit depreciation. The nation’s Treasury holdings will stabilize once the intervention stops and the currency is freely floating, said Steve Wang, chief China economist at Reorient Financial Markets Ltd. in Hong Kong.
“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.
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 ratio. The assumption is that the central bank aims to replenish the funds it drained when it bought yuan to stabilize the currency.
source: Bloomberg
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