China has cut its holdings of US Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to sources 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 sources, who declined to be identified as the information is not public. China has communicated with US authorities about the sales, another source said. The sources did not reveal the size of the disposals.
The People’s Bank of China (PBOC) has been offloading US dollars and buying yuan to support the exchange rate, a policy that has contributed to a US$315 billion drop in its foreign-exchange reserves over the last 12 months.
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,” he said.
The PBOC and the US embassy in Beijing did not immediately respond to requests for comment. Bill Gross, who manages the US$1.47 billion Janus Global Unconstrained Bond Fund, tweeted on Wednesday: “China selling long Treasuries ????”
Two-year Treasuries erased an earlier advance, with their yield little changed at 0.67 percent as of 11am in London. It fell as much as two basis points. The 10-year yield declined three basis points to 2.15 percent, close to its average for last month.
Chinese sales of US government debt might 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 US rates,” he said.
The latest available Treasury data and estimates by strategists suggest that China controls US$1.48 trillion of US government debt, according to data compiled by Bloomberg. That includes about US$200 billion held through Belgium, which Nomura Holdings Inc says is home to Chinese custodial accounts.
The PBOC has sold at least US$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 PBOC aims to replenish the funds it drained when it bought yuan to stabilize the currency.
The yuan rose 0.08 percent to 6.4053 per US dollar yesterday 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 the PBOC intervened to bring stability following the Aug. 11 devaluation. The nation’s Treasury holdings will stop falling once the intervention stops and the currency is freely floating, said Steve Wang (王致翔), chief China economist at Reorient Financial Markets Ltd (瑞東金融) in Hong Kong.
“Strategically, it probably has been China’s intention to find the right time to lighten up its excessive accumulation of US Treasuries,” he said.
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