[ssyyyrruho]

We have all known for some time that US Treasury bonds are basically junkbonds now. Now, someone has stated China's strategy to get rid of those junkbonds without causing a panic .................


There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.

There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be
(1) helping its central bank to decrease exposure to the dollar, while
(2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while
(3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.

The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.

One of the foremost experts who continues to research and track these matters is the highly respected Brad W Setser, a Fellow for Geoeconomics at the prestigious Council on Foreign Relations in New York. His work is providing significantly deeper insight into the size and composition of China's reserves and is affording the world a better view of that country's options in managing its reserves going forward and what the implications of those options might be.

Another expert whose ongoing work is also adding very important, deeper insight into such matters is the highly respected Rachel Ziemba, lead analyst on China and the oil exporting economies at the prestigious RGE Monitor, founded by Nouriel Roubini.

Drawing on the work of these two experts, let's examine the matter of the likely size and composition of China's forex reserves and its investment options going forward, and the probable implications of those options for the dollar.

The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.

As for the issue of the composition of these reserves and its total exposure to the dollar, the most recent Treasury International Capital (TIC) report by the US Treasury has China's holdings of Treasuries at $696 billion as of the end of 2008. However, Setser's research indicates China's total holdings of US Treasuries is likely to be more than that figure, since some of the purchases of Treasuries by the UK and Hong Kong should actually be attributed to China's central bank. China also holds US government-sponsored agency debt (Fannie Mae and Freddie Mac paper) and corporate bonds, but the recent TIC reports indicate its central bank has been steadily divesting itself of these assets in favor of short-dated Treasuries.

As for China's purchases of Treasuries over the most recent three months (October - December of 2008), note this statement from Setser:
And over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.
Setser goes on to make the point that China's central bank is unquestionably divesting itself of the comparatively less-safe assets such as agency debt in favor of very short-dated Treasuries. The best estimates of the total exposure of China's central bank to dollar-denominated assets of all kinds is about 70%, or somewhere between $1.5 trillion and $1.7 trillion depending upon whether you use the $2.2 trillion figure or the $2.4 trillion figure for the total sum of China's reserves.

That uncomfortably high level of exposure to the dollar is what has been causing concern to flare in China most recently. A much more desirable figure, from China's standpoint, of its total exposure to the dollar would be 50% or less of its total reserves. A reserve composition of 50% dollars to 50% everything else is much safer because an excessive decline in the value of the dollar would tend to be offset by corresponding increases against the dollar in the value of the non-dollar assets comprising the rest of the reserves.

In order to get to that more desirable composition fairly quickly over the next several months, China would have to somehow divest itself of as much as $450 billion of its existing dollar-denominated assets, not purchase a significant amount of new dollar-denominated assets, and accomplish all this without triggering a global dollar panic. That's a very tall order indeed - but it is not by any means impossible. How so?

If we stand back to look at Setser's work from a distance, we see what appears to be a clear strategy on China's part that is potentially very compelling. The country has its official reserves, which it acknowledges now total about $1.95 trillion, and it also has its unofficial or secret reserves, which Setser estimates at about $450 billion at present.

Coincidentally (or perhaps not merely coincidentally) the secret reserves total about the same sum that China needs to divest itself of in order to reach the desired composition of its reserves noted in the previous paragraph - about $450 billion. At this point, recall the intriguing and potentially very important statement quoted earlier (see DOLLAR CRISIS IN THE MAKING, Part 2), a statement made by Fang Shangpu, deputy director of the State Administration of Foreign Exchange and reported by the Xinhua News Agency on February 18, 2009:
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions. It might be a hint that Chinese government is not holding as much US government bonds.

China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing. "Whether China is to purchase, and to buy how much of the US government bonds will be decided according to China's need," Fang said. "We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.

Is Fang Shangpu hinting that China has intentionally, as a deliberate strategy, divided its reserves into two general holdings, official and secret, and that SAFE (the State Administration of Foreign Exchange) has ensured that the composition of the official (government) holdings of the $1.95 trillion is such that its exposure to the dollar is not the roughly 70% assumed in the West, but rather something much closer to the desired target of 50%, while the secret reserves hold predominantly dollar-denominated assets?

If this is the case, then China could employ a number of schemes to clandestinely further reduce its total exposure to the dollar, using its secret reserves, all the while maintaining safety for the official reserves.

[Lydiaswingert]

with tens of trillion in foreign debt,,and still printing trillion more.......
the biggest industries in US IS MONEY PRINTING..AND WITH WALL STREET RUN BY WHOLE BUNCH OF CROOKS...WILL ANYBODY TRUST US DOLLARS OR ASSETS???
cHINESE AND CHINA GOV ARE NO FOOL......they have been around for thousands of years....
smart guys better start to unload us $ ...going to sink like TITANIC at the last moment...very swiftly and deep.......

[ssyyyrruho]

with tens of trillion in foreign debt,,and still printing trillion more.......
the biggest industries in US IS MONEY PRINTING..AND WITH WALL STREET RUN BY WHOLE BUNCH OF CROOKS...WILL ANYBODY TRUST US DOLLARS OR ASSETS???
cHINESE AND CHINA GOV ARE NO FOOL......they have been around for thousands of years....
smart guys better start to unload us $ ...going to sink like TITANIC at the last moment...very swiftly and deep.......

The Queen of the litte xeno Britain must be fuming ...
Noticed how the stupid stiff upper lippy Brits bulldogs are copying America's every move and trying to belittle Australia's strategies.

Think UK is the same as Australia - think again, Mr Brown, Mr Darling and Mr King. What is UK exporting besides hooliganism and whineing English pale buttock tourists. At least OZ is exporting a lot of stuff, so the Aussie approach is effective. Brown Darling King need to be whacked by the Queen for plagary.

Now, they are into printing sterling quik without the luxury of a reserved currency. Soon, the GBP will devalue and they will default on their treasury gilt. God save the Queen!!!

And God save debt-ridden America.

Australia is still not feeling the full inpact of a recession. Not sure if our luck will run out.

[ssyyyrruho]

USD dollar note -as good as wallpaper? And US, the beggining of the end ?

Fed to Buy $300 Billion of Longer-Term Treasuries (Update4)
By Craig Torres

March 18 (Bloomberg) -- The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.

The announcement following the Federal Open Market Committee meeting today in Washington spurred the biggest rally in longer-dated Treasuries in decades. Officials unanimously voted to expand the Fed’s balance sheet up to $1.15 trillion, and said they may broaden a program aimed at boosting consumer loans to include other assets, today’s statement showed.

With today’s move, the Fed has committed to buy or loan against everything from corporate debt, mortgages and consumer loans to government debt, after cutting its benchmark interest rate to zero failed to end the credit crunch. The unprecedented campaign comes after a worsening recession sent the unemployment rate up to a quarter-century high of 8.1 percent.

“The FOMC may believe the economy is nowhere near a bottom,” William Poole, former president of the St. Louis Fed, said in an interview today with Bloomberg News. “The Fed is engaging in a massive quantitative easing.”

Quantitative easing refers to using injections of funds into the economy as the main policy tool. Poole is now a senior economic adviser to Merk Investments LLC in Palo Alto, California, and a contributor to Bloomberg News.

Yields Plunge

Benchmark 10-year note yields plunged to 2.48 percent at 4:40 p.m. in New York, from 3.01 percent late yesterday, the biggest decline since records dating from 1962. The Standard & Poor’s 500 Stock Index rose 2.1 percent to 794.35 at the close.

“They wanted to shock the market and they succeeded,” said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital in New York. If the Fed’s action “succeeds in driving primary mortgage rates” to about 4.25 percent to 4.5 percent, that would increase “affordability, which will in turn lead to increased housing demand.”

Central banks around the world are grappling with how to formulate policy with target interest rates near zero. The Bank of England is buying government bonds and corporate debt, the Bank of Japan is snapping up government notes and making subordinated loans to banks, and the Swiss National Bank is intervening to weaken the franc.

Chairman Ben S. Bernanke is employing strategies to stamp out the risk of deflation that he first laid out as a Fed governor in 2002, when he listed purchases of longer-dated Treasuries as an option.

Inflation Subdued

While buying government debt has, in some historical episodes, been associated with causing inflation to soar, Fed officials are confident that consumer prices will remain in check given “weak” demand.

The FOMC said today that inflation could “persist for a time” below their preferred level. A government report today showed that consumer prices, excluding food and energy costs, rose 1.8 percent in February from a year before, compared with an average rate of 2.2 percent over the past decade.

Bernanke is trying to prevent the credit contraction from deepening what already may be the worst recession in 60 years. U.S. employers have eliminated 4.4 million jobs since the start of last year. Industrial production fell 1.4 percent in February, the fourth consecutive decline, while factory capacity in use hit 70.9 percent, matching the lowest level on record.

‘Gradual Resumption’

“Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract,” the FOMC said in the statement. “The committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.”

The global economy will contract this year for the first time since World War II, the World Bank predicts, forcing central banks to keep pumping money into their economies when conventional interest rates are at, or close to, zero.

The Fed has cut the benchmark rate from 5.25 percent, beginning in September 2007, as credit froze and the economy buckled. Policy makers are now focused on how to further channel money to the economy. The Fed has already committed to buying $600 billion of mortgage-backed securities and bonds sold by government-sponsored housing agencies.

Geithner Plans

Treasury Secretary Timothy Geithner also may unveil details in coming days on his plans to remove distressed mortgage assets from banks balance sheets. People familiar with the matter said the effort will involve expanding the Fed’s Term Asset-Backed Securities Loan Facility to include lower-rated, illiquid assets in addition to recent, top-rated debt backed by consumer loans.

The Federal Deposit Insurance Corp. may also get a broader role in the Obama administration’s strategy, the people said. The Treasury may make its announcement as soon as this week.

While the Fed’s actions have helped bring down mortgage rates, those costs have remained elevated relative to benchmark Treasuries. Prior to today’s meeting, the difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.

Yields on Fannie Mae’s 4.5 percent mortgage securities fell 0.27 percentage points from yesterday to 3.97 percent as of 3:30 p.m. in New York, suggesting new-loan rates may be pushed down about 0.27 percentage point, according to data complied by Bloomberg. Thirty-year fixed-rate mortgages averaged 5.03 percent as of March 12.

Types of Treasuries

The central bank will begin purchases of longer-term Treasuries “late next week” and buy the securities two to three times per week, the New York Fed, which will manage the operation, said in a statement. The transactions will be concentrated in two-year to 10-year debt the statement said; 30- year bonds underperformed 10-year notes as a result.

Through emergency loans and liquidity backstops, U.S. central bankers have expanded Fed credit to the economy by an unprecedented $1 trillion over the past year.

Banks worldwide have posted $1.2 trillion in write downs and credit losses on mortgage loans and other assets. U.S. Treasury officials will put the largest 19 banks through “stress tests” and decide whether they need more capital. The banks can raise equity privately or seek more government funds. Officials are also looking at ways to remove bad assets.

Coca-Cola Co., health insurer WellPoint Inc. and more than 30 other companies are tapping longer-term credit markets and paying down their short-term IOUs, a sign of some investor confidence.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

Last Updated: March 18, 2009 16:51 EDT

[zlZ95pjt]

Be prepared to see the U Arse $$$ become a banana currency soon. The U Arse A is doomed.

[loginereQQ]

Be prepared to see the U Arse $$$ become a banana currency soon. The U Arse A is doomed.

That's bad news for Singapore. We need the USA....

[Lydiaswingert]

I still remember playing with stacks of BANANA curency issued by the JAPANESE occupation army in malaya/singapore during the 2nd world war........WORTKLESS.
dont be surprised..U$ is going that way....the moment the FED buy 400B of the treasury bill...the US sand 7%..gold shot up 60U$.....
watch out everybody....the 2nd FINANCIAL TSUNAMI is already started...under the calm of the surface...it will sweep the world ..and swallow many unfortunate individuals..institution..even governments....CHAOS.. sadly..

[Dominick Yo]

I still remember playing with stacks of BANANA curency issued by the JAPANESE occupation army in malaya/singapore during the 2nd world war........WORTKLESS.
dont be surprised..U$ is going that way....the moment the FED buy 400B of the treasury bill...the US sand 7%..gold shot up 60U$.....
watch out everybody....the 2nd FINANCIAL TSUNAMI is already started...under the calm of the surface...it will sweep the world ..and swallow many unfortunate individuals..institution..even governments....CHAOS.. sadly..

The most worthless currency is the Yen, followed by the Sterling. Look for a battle now with the US and Euro. US Fed want to sink the dollar below and dun like the dollar strength right now

But little do US Fed chief realize, EU will print money soon and people continue to put thier $$$$ into US$ for safety.

Poor US, try so hard to sink thier currency and cannot. Too big leh.