Saturday, December 04, 2004

The Chinese are losing interest in US treasuries, but they're determined to keep the US housing bubble alive.
In contrast to Japan, China's money managers, while selling little of their existing Treasury holding, have not been buying much more. China's foreign currency reserves rose by $111.3 billion in the first three quarters of the year, according to official Chinese data. But its Treasury holdings, American filings show, climbed by only $16.4 billion.

Instead, officials at the State Administration of Foreign Exchange in Beijing have been seeking higher yields by plowing billions of dollars a month into bonds backed by mortgages on houses across the United States, according to bankers who help Beijing manage the money. By helping keep mortgage rates from rising, China has come to play an enormous and little-noticed role in sustaining the American housing boom.

The proportion of China's hoard in Treasury securities has dropped to about 35 percent, they say, compared with the roughly 90 percent of Japan's foreign currency reserves still parked in Treasury securities.
This fits in nicely with news coming out of the Freddie Mac 5-year bond sale earlier this week which "saw Asian investors score a record 40% of the 4% reference notes" and the concomitant fall in interest rates on 1-year ARMs.
China, more than many countries, treats its foreign currency reserves as not just a way to control the value of its currency in international markets but also as a form of national savings. That is one reason its traders are encouraged to take greater risks in search of higher returns.
And mortgage-backed securities pay higher returns than T-bills. The record-breaking foreign purchase of US corporate bonds in September could also very well have been driven by the Chinese authorities using third parties to seek out higher returning US investments.

Which means, of course, that it's now all up to Japan to fund the US budget deficit. And with only one buyer, you'd think the Japanese could start demanding a bit better return on their investments.

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