China ready to raise holdings of US treasuries as the yuan stabilises

PUBLISHED : Wednesday, 07 June, 2017, 6:55am
UPDATED : Wednesday, 07 June, 2017, 7:04am

China is prepared to increase its holdings of US Treasuries under the right circumstances, as officials judge the assets are becoming more attractive than other sovereign debt and as the yuan stabilises, according to people familiar with the matter. Treasuries surged on the news, driving yields to the lowest since November.

The people didn’t specify the exact circumstances for continuing a run of purchases that has extended to two months through March, after reductions in all but one of the previous eight months. The nation has maintained the trend, said the people, who asked not to be identified because they aren’t authorised to comment on the matter publicly. The yuan has climbed more than 2 per cent against the dollar this year, after plunging 6.5 per cent in 2016 in its biggest decline in more than two decades.

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While China reduced its ownership of Treasuries last year by the most in data going back to 2000 as it sought to defend the yuan, it has since changed strategy and added to its holdings in the two months through March. Policy makers have also recently signalled support for the currency, with a senior central bank official saying Tuesday that the nation is looking to promote yuan globalisation and the government announcing on May 26 that it’s considering changes to the currency’s fixing mechanism to reduce volatility.

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“When the yuan appreciates, China has the opportunity of building up its foreign reserves as the market has been concerned about the reduction of the reserves,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd.

“Buying US bonds will help boost confidence, as officials want to show that any anxiety about yuan weakness or devaluation was excessive. They don’t want the exchange rate to appreciate or depreciate in a large magnitude before the Communist Party congress later this year.”

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In March, China increased its holdings of US government bonds, notes and bills by US$27.9 billion to US$1.09 trillion, the latest data show. Adding a US$3.7 billion rise in Belgium’s ownership, which is often seen as a home to China’s custodial accounts, the total increase was the biggest since 2014. The stockpile shrank US$320 billion last year.

China’s shift to buyer of Treasuries coincides with a four-month rally that’s reversed much of the sell-off triggered by the US election in November. Investors have piled back into bonds on fading expectations for quicker economic growth and inflation. In trading Tuesday, the 10-year yield dropped as much as 5 basis points to 2.13 per cent, the lowest since November 10. The maturity yielded about 1.7 per cent a year ago.

Signs of renewed appetite from the second-biggest foreign owner after Japan may help cushion the US$14 trillion Treasuries market as the Federal Reserve debates unwinding its massive bond portfolio.

“I don’t think it’s a reason to buy Treasuries right away, but it does increase the chances that China will continue to add to their holdings for the rest of the year,” Anthony Cronin, who trades Treasuries for SocGen in London, said in an email. That buying “may pick up some of the slack if/when the Fed decides to let some of their holdings run off.”

The Fed is widely expected to raise borrowing costs next week, narrowing the rate gap between China and the US and making American assets more attractive. China’s Communist Party will hold a twice-a-decade leadership transition this fall.