Beijing's US Treasury holdings dip | Hacker News Reader

Beijing's US Treasury holdings dip

asia.nikkei.com

115 pointshhs103 comments

This is a misrepresentation which is trying to paint a relatively weak position as a stronger one. A small fraction of that money is being spent on gold. According the financial times[1], China only bought 15.6 tonnes - about $675 million worth[2], compared to the dollar deficit of ~$7.5 billion.

China has a trade surplus with the US, but is net losing dollars because it has to use dollars to buy oil and other imported goods as very little international trade is transacted in yuan. They aren't choosing to shift away from the US dollar. They need them and are going through their stockpile.

[1]https://www.ft.com/content/ca50aa10-8b18-11e9-a1c1-51bf8f989... [2]https://www.wolframalpha.com/input/?i=value+of+15.6+tonnes+o...

Your argument assumes China could find more than ~$675M of physical gold on the market in April.

The trend is even weaker for the previous 6 months. The financial times article also mentions those numbers.

Would you mind expanding on your point? I understand that there is limited trade in gold, but why does the fact that they are running up against a limit in buying gold matter to the argument?

There's a common belief among conspiracists/Zerohedge believers that the amount of physical gold is basically fraudulent, and that the gold that is being traded doesn't exist. So when the coming financial crisis happens and gold becomes the currency of trade, when people actually open up their coffers, they'll see that it either doesn't exist or it's gold bars filled with tungsten.

You’re correct here; however, the narrative that China wants Americans to see is that they can mess up the dollar. The truth is selling a huge pile of dollar denominated bonds wouldn’t do much other than hurt China by pushing up the yuan and thus depressing exports even further.

And given that the dollar has been very relatively high for the last five years, now is an ideal time for China to begin selling. I'd like to see them get on with it. The Fed should immediately start a repurchase program and take the entire position off of China's hands permanently. China of course won't do any such thing, even if the trade war gets worse. The only value in it is the bluff, because it would barely scratch the dollar if they began more aggressively selling. It'd be a great excuse for the Fed to run some more QE and lower the cost of some US debt.

Ok, we'll switch to the subtitle above.

Additionally, China's gold acquisitions may be as a hedge against inflation risks as they (a) devalue the RMB; (b) reportedly see 70% increases in pork prices due to swine flu, and (c) need to purchase gold to keep their ~3 year old RMB/Gold/Petro market intact.

>China has a trade surplus with the US, but is net losing dollars because it has to use dollars to buy oil and other imported goods as very little international trade is transacted in yuan

China is a net exporter to the tune of half a trillion per year. I don't see how they could be running out of dollars. Your first link is behind a paywall so I'm not sure what stats they use to back that up.

Domestic spending?

Denominated in RMB, which they can print. They aren't spending their USD reserves internally only when they need to purchase stuff from abroad.

I believe the missing factor is investment. You're likely referencing numbers just for trade. There is also foreign investment to consider. I believe China has been a large net investor for some time and those investments, by their foreign nature, reduce China's foreign reserves as well.

Sure, it's possible they have a net negative dollar flow because of investments. But that's a lot different than having a net negative dollar flow because they're importing oil.

There is some nuance here. We can talk about all of their net flows as if they're denominated in a given currency, but this article is specifically talking about their reserves of a particular currency, and oil is a very large reason for the continued depletion of their dollar reserves, independent of their overall account balance when all of it is converted to dollars. I don't have a good knowledge of what their other currency reserves are, or the feasibility/implications of converting such massive dollar figures between currencies. If you want to provide some more details about the particular figure you mentioned, we might be able to discuss it more meaningfully.

This cite has them at 873B of net exports with about 200B in petroleum imports in 2017:

https://atlas.media.mit.edu/en/profile/country/chn/

The net exports decreased to about 500B for 2018. I can't seem to find a dollar figure for 2018 oil but I've seen articles saying imports are up 10% by volume. So total petroleum imports are less than half of their net export amount. Meaning that they could triple their petroleum imports and still be a net exporter.

Yeah, hard to tell just looking at that data. I don't know what currencies each one of the trade relationships is settled in. The differences in balance with the US there is also similar to what they spend on oil (~11%). If all other trade is settled in other currencies and all oil is bought with dollars(from countries other than the US), they would be about flat in terms of dollar reserve growth from trade. My understanding is that most of their dollar reserves originated from buying dollars w/ yuan in the years after 2009 to help keep the value of the yuan depressed for the sake of trade competitiveness. So that does seem to imply that investment balance is the factor tipping the balance here. Which is probably why the Chinese government has set stringent rules on currency controls for individuals.

Which currency the trades are settled in is effectively meaningless as long as it's hard currency. If they end up with a surplus of Euros and a deficit of Dollars they can easily exchange Euros for Dollars. If they end up with fewer dollars it's mostly by choice.

We're talking about hundreds of billions of dollars here. How confident are you that you could 'easily' do that without major undesired effects?

This cite says the average daily volume of EUR/USD trades is half a trillion a day:

https://www.currenciesfx.com/index.php/eur-usd

So hundreds of billions of dollars a year is small relative to the volumes being traded.

Very little of that is true demand. That corresponds to 10x American GDP annualized.

Net exporter to the U.S... But as the OP points out, they do other things with US$ such as buy oil and invest. You are right that they aren't running out of dollars, but they aren't stockpiling them at the rate of the trade surplus either.

That half trillion net export includes oil imports.

Watch what happens when the Fed decides to cut rates again. Treasuries will be dumped massively.

In favor of what?

That would only affect new bonds not existing ones. Even if assumed true (their current push is an interest rate rise) dumping old more valueable ones in response wouldn't make sense.

From "Currency Wars: The Making of the Next Global Crisis", which I read too many years ago to clearly remember, this was a economic war strategy. During economic war-games the Pentagon set up this strategy was successfully employed.

China, Russia- the "anti-west" powers started buying gold, dumping US debt and finally proposed creating their own currency for regional trade instead of using the USD as their reserve currency.

This is a summary based on a book I can't really remember and concepts I might not have understood. That said, I do remember it was a good book, worth a read.

This is not much of an "economic war" strategy, TBH - it's just a very visible signal of the "hey, we hate the U.S." sort. The "reserve currency" one uses as part of world trade is immaterial, except for convenience; the U.S. are not perceptibly better or worse off as a result of such choices.

Tariffs and trade barriers though? Now, there's some "economic war" if I've ever seen it! "When goods won't cross borders... armies will."

>the U.S. are not perceptibly better or worse off as a result of such choices.

How is that true? We can print more dollars. We don't have the same kind of control over other currencies.

"You can print more dollars" only as long as market participants trust that you're not going to print too many dollars - as soon as you try to do anything of the sort, your status as "safety deposit box of the world" goes away. That's not much of a privilege!

In most of the analyses I've read, the petrodollar has been of huge benefit to the US - effectively propping it up in the face of massive QE efforts and (in theory) allowing much more to be printed to service debts than would otherwise be sustainable.

I mean, there must be some reason that trading or threatening to trade oil in Euros is practically asking for some kind of forced regime change.

>In most of the analyses I've read, the petrodollar has been of huge benefit to the US - effectively propping it up in the face of massive QE efforts and (in theory) allowing much more to be printed to service debts than would otherwise be sustainable.

It's not as simplistic as good or bad for the country. If have a good job and you want to buy a lot of imports then it's good. If you want to be a factory worker it's bad because what you make is more expensive for other companies to buy.

Sure, a weak currency is better for basic exports. It's widely accepted that Germany prefers a weaker euro to a stronger mark.

We can look at the US's behaviour, though, to determine whether they think it's valuable to them or not. It's had every year since the petrodollar was established post WW2 to push the world towards using the Euro and instead has fiercely defended it.

> they think it's valuable to them

"They" in this case are the elected politicians that are in the "good jobs that buy imports" category and/or dependent on that category for political support.

It’s not that simple. Being the reserve currency also puts weird pressures on the US economy when other economies have issues. The total effect of which is probably not well understood.

“ COMMISSION RECOMMENDATION

    of 5.12.2018

on the international role of the euro in the field of energy ”

https://ec.europa.eu/info/sites/info/files/c-2018-8111-recom...

Does that mean the EU is going to be forcibly regime changed?

Now Facebook has Libra to replace US dollars.

Individual Chinese, Russian, and Saudi billionaires generally invest heavily in US based investments (real estate, stocks, bonds, etc..) as a hedge against the political and legal uncertainty in their own countries. The US at this point is basically the safety deposit box for the world elite, and until that changes I highly doubt there will be much interest in coordinated economic war against the US. There will be some posturing and saber rattling though.

You think the prediction made in this book about returning to a gold standard can still happen?

> Some of this capital is going into gold. China's gold reserves have grown for six straight months since December, the first time the country increased its holdings of the precious metal in more than two years. Russia has made similar moves, slashing its dollar-denominated assets while purchasing gold as essentially a borderless currency.

I know it's crazy but I have to ask - with countries seeking more neutral currencies, could it be fathomable that adoption of digital currencies would grow as well?

Digital currencies seem to have separate barriers. There also arent any countries providing bonds in crypto so the mechanisms employed by countries to manipulate currencies wont take effect.

Governments wouldn't do it themselves. The average person still sees crypto as risky and volatile (if they are familiar with crypto at all)

https://en.wikipedia.org/wiki/Sovereign_Currency_Act_of_2018

The intention is for China to reliably store capital, but digital currencies have not only been extremely volatile but also have hackable private keys.

Swiss Franc is the primary alternative. I don't see digital currencies going farther away than being used in the dark market/crypto-trading.

It is, but it's too small for china.

This doesn't seem particularly newsworthy. It's such a tiny blip that it's immaterial.

The RMB & USD have traded in a very tight range throughout 2019.

Really it is about the trend. China couldn't just dump their treasuries (as explained in the article) as they would lose a lot of value that way. So dribbling them out and exchanging them for gold maximizes the value returned. At $20B/month that is a pretty steady pace of a quarter trillion a year.

EDIT: A quarter trillion not billion dollars, thanks.

I think you might have meant a quarter trillion.

So true, just 3 decimal orders of magnitude :-). And it would eliminate their holdings in 5 years if they were to stick to it.

I think you meant a quarter trillion?

A trillion here, a trillion there, pretty soon you're talking about real money!

So far as I know, the rmb/usd rate is still pegged within a range by the chinese government?

China is in a delicate position. They're fighting trade war from weaker position. Their diversification to gold makes sense. They probably know that they don't have the power to "sink" the dollar. If they need the dollar in the future, they can still sell their gold and purchase US treasury again.

I think they are testing out strategies. Gold is an alternative. The US and its European allies still control most of the gold reserve. Western countries have an upper hand if currency war moves to gold.

Some Asian countries are voicing support for gold backed currency. But they together don't have substantial gold reserve. I think China is waiting for a break of European countries to gold. That would be a real opening for them in this battle.

There's also bitcoin. China doesn't like it because the system is decentralized and supply is limited. They can't easily take control of the market. But the US also face similar issues. That would make an unpredictable battle field. For now, it seems China is treading slowly with gold.

The only thing that really matters is the relative percentages of what currency is used in international trade. If you need to buy stuff from outside your country and they want to be paid in USD then you need USD to pay them. The RMB isn't really that useful outside of China, I don't honestly see gold being the substitute because there just isn't enough of it, any gold backed currency would end up deflationary and people would hoarde it for the sake of hoarding it.

Gold backed currency doesn't have to be 1-1 with gold. You can use fractional reserve to issue more currencies. Or you issue bond to borrow. Given you keep your promise to pay debt and allow people to redeem currency using gold. People will trust you as long as you keep your promise and have enough gold reserve.

I personally think having the ability to hoard gold is good. I can decide that for myself. It's easier to understand than the voodoo economics of money printing. It's the fallback to keep accountability.

This was all done already, it got replaced with our existing system, nobody with the power to go back to the gold standard will do so because it takes power away from themselves...

It makes sense if you don't have the power to print USD. In this context, it makes sense for China. Gold backed systems have existed for thousands of years until 1970s. I wouldn't count it out after a few decades.

Gold would be extremely deflationary.

It is what made the great depression worse.

If the Fed didn't "print money" as QE1, QE2, QE3 then you would have 25% unemployment in the US alone.

Having half of society unemployed just so that you can "hoard gold" would lead that half of society taking up guns to take it away from you.

Be careful what you wish for.

The problem with QE is you will have QEn. Everyone will do QE on their economies. We don't have any accountability. During the 2008 crisis, we were told this is the right thing to do. And we keep doing it.

We're not at the stage where half of the society is unemployed and hoarding gold. We're at the stage where everyone is doing QE on their economies.

Having full employment for the sake of full employment is dumb. That's the same as communism.

The goldbugs all said the fed and its helicopter money would have lead to hyperinflation at this point. Well every major central bank in the world did QE and it didn't happen, inflation barely cracked 5% if I recall? And quickly retreated from there.

The QE technique is interesting and new. They write up the money on Fed book as liability without pumping printed money into the economy. I think it's recently possible because our money is mostly digital now. You can look at US national debt clock. It's there.

I think inflation is shifted into debt on Fed book. Between having some inflation and blowing up the debt, I think having some inflation is better now. You don't want to load up all your risks in a central book. But our political class doesn't want this. They want to keep loading up debt. We'll then have a QE race between nations. Maybe, at some point, we come to love each other and burn our debt on each other books. JK, that'll never happen :)

Not all nations to QE - quantitative easing, some to QE- qualitative easing: https://blogs.wsj.com/chinarealtime/2014/08/11/how-chinas-tr...

The US President is looking to the Federal Reserve to interest lower rates. By reducing their T-Bond holdings and curbing future purchases, China is increasing the volume of T-Bonds the Federal Reserve must purchase in order to achieve the US President's wishes of lower interest rates.

It seems like a good move, seeing as the President's base has a negative opinion of national debt and government interference.

Massive selling pressure would push bond yields up. Fixed income security prices and yields have an inverse relationship

Right, which means that the Fed will have to buy even more to push rates down.

This is really weird. You buy something and sell something. This is entirely up to customers. Why make it so big deal? It is the customers' freedom to do so.

So respect the customers' choice, respect other countries' choice. They want to sell, let them sell.

This is a report of publicly released numbers, it isn't a judgement. No one is trying to stop anyone.

I saw people here discuss about WAR.

You should have replied to them, since this is just reporting what China's official information is. China and Russia have been buying gold for many years now.

Another discussion on current state of China (was on the homepage, but got flagged right away)

https://news.ycombinator.com/item?id=20215382

Selling large amounts of dollars to buy gold should devalue the dollar against other currencies, right?

Isn't that what Trump wants to happen anyway? (Looking at his attacks against the fed [1], for not dropping rates or attacking the ecb for planning to do so and thus devaluing the euro:

Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others. [2]

[1] https://www.bloomberg.com/news/articles/2019-06-18/white-hou... [2] https://twitter.com/realDonaldTrump/status/11409356202919649...)

Why is this a good move in the trade war then? What am I missing?

> Why is this a good move in the trade war then? What am I missing?

Because then America is poorer in the world and is not the biggest customer any more. Thus it cannot bully the rest of the world.

Something having cake, something eating it too will not work.

> is not the biggest customer any more. Thus it cannot bully the rest of the world.

That is exactly what Trump wants. Reduce trade deficits, more manufacturing in the USA instead of importing from China. Since that seems to follow I am trying to understand the move.

This was my first thought, but I'm not sure this is true. Buying debt from the US government increases the numbers of dollars in circulation (since bonds are redeemed in dollars) and shores up its price. Selling this debt to someone else (i.e., not back to the US government) doesn't destroy those dollars, it just changes its owner. It's not clear this would result in devaluation.

> increases the numbers of dollars in circulation (since bonds are redeemed in dollars)

But following supply and demand principles, increasing the number of dollars in circulation should lead to inflation/devaluing of the dollar, right?

You are right, my initial assumptions are wrong - China isn't buying bonds from the US Treasury (as I would), they are buying them from a forex bond market, where we might consider the supply of dollars to be like any other commodity. This means when they buy up bonds they are decreasing supply, therefore driving up the price, and when they sell off bonds, they are increasing the supply of dollars, causing the price to fall.

Wow. My first downvoted comment ever. I don't really understand why? Just because it mentions Trump? The comment is neither pro nor anti Trump. I just try to understand, why this is a move in the trade war by China. Judging from the top comment it's not completely wrong either. Why the downvotes?

Maybe I am just ignorant, but I do not see the appeal of gold.

"Gold. How archaic." is what I immediately think. So many other commodities will hold value, even in the worst of times, being either useful or desired, and have long shelf lives.

Real question...what is useful about gold today that makes it valuable, other than it's scarcity?

It is actually an industrial metal.

All sorts of electronics have gold in them. Minute traces, to be sure ... but it is a use ...

Its scarcity is the primary reason it holds value, from what I understand.

But: https://en.wikipedia.org/wiki/Gold#Other_applications

Electronics mostly, it seems.

It's scare.

Yes.

It's a rock trading card that people have been trading for thousands of years.

The industrial uses exist, but it's a vehicle of Economic exchange.

This is why I find Bitcoin useful. It's nuclear chemistry proof.

Let us say that there was a nuclear war, and everyone left is near starvation, lacks resources and security. What holds value? Gold? I'd say useful or desired commodities: Food, fuel, guns, working machines, liquor, tobacco. Perhaps gold will be settled on as the most fungible (and transportable) material for trade, but if I were preparing for such times, I would be betting on the commodity, not an inert bit of metal.

Of course those commodities are pretty terrible currencies in non-destabilized to a dark age times.

>This is why I find Bitcoin useful. It's nuclear chemistry proof.

But not people proof, as it's wild fluctuations will attest to.

If we have energy cheap enough to make nuclear transmutation a practical source of gold then the economy is already unrecognizable.

Completely agree.

Gold is a symbol. Gold is the color of the sun. Gold is a pure metal (which doesn't rust).

It's like the metal of the gods.

It’s the incredibly long and consistent history of being considered valuable. It cannot easily be devalued by any government, unlike any fiat currency. It’s extremely portable, even for relatively large values of it.

And faith in all those things is what gives it value.

https://www.npr.org/sections/money/2011/02/07/131363098/the-...

Its scarcity. The US Federal Reserve can create dollars at their discretion, but they can't change the chemical composition of the earth's crust. You can think of gold as insurance against fiat currencies being debased by their issuing governments. You can also be pretty sure that it will be valuable anywhere you go.

Gold has been the longest most stable 'currency' historically. Governments with some of the largest economies hold large supplies of gold (and they're not trading it for BTC). It's value has been on par with inflation since we've started keeping track of its value. This creates confidence among buyers.

People agree it has value because the most powerful players in the global economy agree that it has value. There is also a limited amount of it.

> There is also a limited amount of it.

Do people trade gold 'still in the mountain'? I could start a market for gold still underground, effectively saying "you have purchased 1kg of gold, but to redeem, you have to pay $500 of mining costs".

Since there is a near unlimited supply of gold in the entire earth's crust, that could work to make a price ceiling on actual gold, which in turn would severely reduce its use as a reserve currency.

I see your point but it's not like we ever just mine a ton of gold and flood the market. New gold gets mined but it's not done at a rate that influences that market price. Theoretically yes, there is an unlimited amount, but in practice most of that gold will never be found.

Not sure why you're being downvoted. It's a valid thought.

And Warren Buffet agrees gold is not a good choice because it's not a productive asset. A bar of gold in your safe won't produce anything. After 50 years it's still just a bar of gold. Compare that to what the market does over 50 years.

It's better to buy farmland or part of a company or a property that you rent out. Productive assets.

Which market, and which 50 years? Looking at a global inflation map, one would have fared better with gold in a surprisingly large number of countries. I will concede that the US has had a great past 50 years - but I do not believe in infinite growth from finite resources, on the other hand I'm not going to hazard a guess as to when the growth will slow down.

> After 50 years it's still just a bar of gold.

Not rusting or otherwise degrading is a great thing. Gold is not just pretty to look at, it has great electrical properties that make it useful to industry

China owns a considerable amount of American debt. If they sell it off, the result could be a major drop in the US dollar. Combining this with tariffs we could see Russia in the 1980s style shortages (ie: nothing on the shelves). Countries which have been blockaded (ie: Cuba, Iran, Venezuela, etc) always have their economy drop. Doing it to ourselves is, in my opinion, self injurious.

Who exactly would China sell that debt to, and for what? How would that impact the US dollar? They certainly aren't going to cut off exports to the US.

They can "sell" a lot of it back to the US government. The debt is held in bonds that mature. Big bondholders regularly roll their bonds over, so it acts as if they're just holding the same debt indefinitely. But some fraction of their bonds mature every month, and if they don't buy new ones, the government has to give them their money.

It doesn't directly impact the dollar, per se, but it does mean that the government has to find the money elsewhere to continue operations. If it has to look harder, it will have to spend more, and that ultimately has to be backed by the taxpayer.

That's really not how US bond sales work in practice. The Chinese government is a relatively small player. And you didn't account for FOMC operations.

They could sell it back onto the open market and convert it to USD. Alternatively they could wait for it to mature and get USD.

The key thing here isn't about the reserves, its how they they acquired them by creating a swap on USDCNY from Chinese exports from their reserves - effectively holding the Yuan from appreciation.

The other thing is for the trade deficit to decrease the reserves need to decrease too. The reserves, especially the way they were created using swaps give a proxy of USD held savings held but not yet poured back into the US (and hence creating a trade deficit).

This is all of course useless if the holder of those bonds is still China, but through another country such as Belgium with an overseas account - which they've done before.

The Fed can trivially replace China's US debt holdings, just as they could with Japan if needed. They can run a $50 billion per month QE program - starting at any time - and permanently, calmly remove China from the equation and the US dollar would hardly notice. US households are sitting on $110 trillion in wealth for comparison to what a $1 trillion debasement by the Fed actually means (and that ignores the dollars outside the US). China's holdings are typically around ~5% of US national debt and declining (eight to ten years out, it will be 2.5% to 3% if nothing else changes; ie increasingly meaningless).

It's ideal for all US debt to be held domestically if only to remove this constant absurdity that people fall for, the propaganda that China (or the Saudis et al) could do anything to injure the US using their very modest treasury holdings.

So far the US hasn't actually done anything drastic with tariffs, even with regards to China. Mostly what Trump has done is use it as a bluff to get concessions, and that's mostly all that he will do. China may be the exception, as necessary. That may be warranted, the US should match China's barriers if China doesn't start opening up fair access & treatment re their economy.

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