China: Treasury sales
Already in November, Beijing sold $9.3 billion worth of Treasury securities. And this December, Beijing sold a further $34 billion in short- and long-dated Treasury securities: that represents 4.3% of its total holdings of Treasury securities, or 1.4% of its total forex reserves of $2,4 trillion.
There are a couple of purported political reasons for Beijing having taken "revenge" on America. First, America's arms sales to Taiwan, and secondly, the Dalai Lama's current visit to America. The problem with this vengeful thinking is that China sold the Treasuries back in December - way before arms sales to Taiwan and the Dalai Lama's current visit to Washington.
But there are a couple of good business reasons why China is selling some of her Treasuries. First, she can take the proceeds and buy into other, weaker currencies that will strengthen later on. For instance, she can buy Euros more cheaply now than she was able to a year ago. Secondly, Beijing sensibly wants to diversity out of her massive holdings of US dollars, knowing that reserve currencies always plunge in trend. Indeed, back in 1971, the Swiss and the Japanese had to spend four times more than today in their respective local currencies for one dollar.
Whilst we are painfully aware of mounting political tensions in the Sino-US theatre, we do not think that Beijing will cut off her nose to spite her face by selling US Treasuries in order to wreak revenge on America.
If anything, Beijing is merely hurting the value of her own holdings of US Treasuries by selling them. After all, even if she sold only 4.3% of her total Treasury holdings this December, prices are made at the margin. This goes to say that China needs to sell very little for the "announcement effect" of her sale to drive down Treasury prices. Why would China want to cut herself in the foot by reducing the value of her own holdings of Treasury securities?
Thus, our belief in Chinese pragmatism keeps us from getting worried about her sales of Treasuries this November and December.
