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US Treasuries Is a 36% Question

Jan. 08, 2011 6:38 PM ETBIL
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For China, To Buy or Not to Buy the US Treasuries? That Is More Than a 36% Question!
US Treasury Securities or Treasuries generally include marketable Treasure Bills (T Bill - matured in one year), Treasury Notes (T Notes - matured in one to ten years), Treasury Bonds (T Bonds or Long Bond - matured in 20 to 30 years), and Treasury Inflation-Protected Securities (TIPS - inflation-indexed bonds). US Treasuries are debt financing instruments issued by the US federal movements, in order to provide necessary monetary finances to fund various federal government agencies, organizations and projects. Total marketable US treasuries in June 2009 are close to $4.6 trillion, of which $2.6 trillion, or 57%, was purchased and held by foreign nations.

In 2008, China for the first time surpassed Japan to become the largest purchaser and holder of US Treasuries. It has maintained to be the largest US Treasuries foreign nation holder ever since. As of September 2010, China holds $883.5 billion of US Treasuries.  Japan is a very close second and holds $865 billion. Other major foreign nation holders include United Kingdom $459 billion, Oil Export Nations $230.5 billion, and Brazil $175 etc. In another word, China and Japan each holds close to 20% of the total US Treasuries issued, that is about 33% each of the total portion held by all the foreign countries. These huge amounts of low cost foreign monetary infusions into the US have provided lifeline blood support to the on-going operations of US government and economy.

Ten years ago in 2001, China’s US Treasuries holding was only $72 billion. As the “world factory”, China has enjoyed a rapid double-digit growth in the last ten years and its Foreign Exchange Reserve has been taking a skyrocket ride to reach $2.65 trillion today. Moreover, it is still adding more than $20 billion in its FER each month. Majority of China’s growing Foreign Exchange Reserve has been invested into US, in the form of Treasuries and Non-Federal securities. For a long time, China’s portfolio diversification on its huge Foreign Exchange Reserve has been using a 1/3 rule. That is, about one third of the China’s FER would be invested into the US Treasuries, another one third would be invested into non-federal US securities, and the rest one third would be invested into the non-US markets around the global. 

The China investment into US was reaching its peak in 2006, when the percentage of the total US Treasury and non-Treasury securities was 70% of its total FER. However, this percentage of total US Treasury and non-Treasury securities in its total FER has declined steadily ever since the 2006 peak. The US Treasury Department may have some more comfort to see that the percentage of the US Treasuries in China’s total FER has consistently maintained around 36%, even after ~$50 billion major reductions reported several months ago. US might hope these were normal market fluctuations that have caused the increase and reduction of the Chinese Treasuries holdings. For the non-Treasury Securities, however, the outlook is definitely very gloomy right now. The non-Treasury Securities ratio in China’s total FER has reduced significantly in the past several years. In the peak 2006-2007, this ratio was close to 32% and has been reduced more than half to 15.7% in 2010. At the same time, the China’s total US Treasury and non-Treasury Securities has declined dramatically to below 50% of its total FER.

This should be a big alarming signal, showing China has been losing confidence on US economy. The question is, if China is no longer interested in investing into the non-Treasury US securities which are more related to the US economic activities, how much longer it will hold its confidence on the US federal government? US government must stop its window dressing and truly push for a steady economic recovery.
Rely on the 36%? Don’t count on it.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in C over the next 72 hours.

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