Monday, March 8, 2010

Mackenzie: Chinese reserves rebalancing

"...In terms of China's portfolio of Treasuries in the Tic report, the December data show a further big reduction in holdings of short-dated bills and buying of longer-dated coupon debt. China's T-bill holdings dropped by $38.8bn in December while its holdings of notes rose by $4.6bn.

Rather than selling any of its holdings, China appears to have let the bills mature and then used some of the proceeds to buy longer-dated coupons, analysts say. Extending its purchases along the yield curve is, partly, a sign of China's confidence in the US government's ability to service its debt. The Tic data show that China has not diversified into US equities or corporate bonds.

During the financial crisis, China built up holdings of short-dated T-bills from $14bn in mid-2008 to $210bn by May 2009 and they are now back around $70bn.

"The latest data is consistent with them shrinking the T-bill mountain rapidly, although there is more to come, as the likely underlying desirable holdings of T-bills is probably nearer $20bn," says Alan Ruskin, strategist at RBS Securities.

"China is simply fine tuning its portfolio and as US banks and consumers continue deleveraging, there will be enough domestic demand to buy Treasuries," says John Brady, senior vice-president of global interest rates at MF Global..."

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