U.S. Treasuries? No, thanks!
By: BJ Lawson
The Financial Times has an interesting series of articles exploring the rapid growth of Sovereign Wealth Funds (SWFs). These are investment vehicles for governments to invest surplus reserves from foreign exchange. As you can see below, while these funds were traditionally the domain of oil-producing countries, China’s prowess in accumulating dollars is formidable. They’re taking baby steps towards being greater activists with their investments, allocating $200 billion for a new SWF that is still a relatively small proportion of their $1.3 trillion in foreign exchange reserves.
Why is this phenomenon interesting? Well, SWFs provide an alternative to governments’ central banks simply buying and holding U.S. Treasuries for a “risk-free” return. Looks like China is beginning to hedge its dollar exposure through this type of diversification, long practiced by our friends such as the UAE in the Middle East. It’s estimated that SWFs have $2.5 trillion currently under management, expected to grow to $12 trillion by 2015. (I wonder what a dollar will buy in 2015, though?)
So how is China going to deploy its $200 billion? Well, they started (and took an initial hit) with a $3 billion position in Blackstone Group prior to its IPO. Needless to say, all of their investments won’t be in the United States, though. I’d imagine they’ll look for opportunity where they’re comfortable looking, and where they expect growth. In any case, it’s clear that their appetite for U.S Treasury bonds is limited.
The increasing importance of government funds taking investment positions sparked a healthy debate led by Lawrence Summers here. It’s also created a bit of protectionist rhetoric, as well.
It’s interesting to consider the consequences of our government’s creating such massive amounts of debt. Without our government selling several hundred billion dollars in new debt every year, the dollars that China and other trading partners receive from foreign exchange would be either be exchanged back into their native currency, or used to purchase other dollar-denominated investments or goods. Those choices are the desired outcomes from trade and foreign exchange.
If anyone you know tries to blame China for their creative efforts to deploy their surplus reserves, just ask them who sold the bonds to China in the first place. Too bad no one ever read us the Miranda warning of international finance: “You have the right to sell debt. Any debt you sell can and will be used against you in the marketplace.”
September 5th, 2007 at 11:28 pm
This just in from our friends at Briefing.com:
00:12 Is China quietly dumping US Treasuries? - Telegraph
Telegraph reports a sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable. Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48 bln since late July, with falls of $32 bln in the last two weeks alone. “This comes as a big surprise and it is definitely worrying,” said Hans Redeker, currency chief at BNP Paribas. “We won’t know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don’t seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros,” he said. While the greenback has been resilient over recent weeks - even regaining something of a ’safe-haven’ role as banks scrambled to buy the currency to cover dollar debts - most experts believe that America’s $850 bln current account deficit will eventually cause the dollar to resume its relentless slide. David Powell, an economist at IDEAglobal in New York, pointed the finger at Beijing as the main suspect in the sudden bond flight this summer. In a client note entitled “Has China started to dump US Treasuries?”, he said the sales appear to coincide with early moves by Beijing to launch its new $300 bln sovereign wealth fund. The scheme is part of the government’s plan to diversify it $1,340 bln reserves from bonds (mostly in the US) to a broader portfolio of investments and a better yield.