China and Treasury International Capital Flows

One of the idiosyncracies of the rather obscure at times Treasury International Capital flows data is that when reporting on the number of Treasuries purportedly being held by foreign nations, the data is taken from the country in which the transaction is actually conducted and not necessarily the country of origin behind the purchase.

In looking over the recent data, it appears a fairly large amount of Treasury business is being handled through London as evidenced by the sharp increase in reported Treasuries holdings in the UK.

It has been my experience with this report, that when the adjustments are made once a year and the Treasuries are actually recorded as to what nation the purchase or sale originated from, that a rather significant amount of the UK Treasuries are moved to the Chinese category. At least that has been the pattern for as far back on the chart as I have chosen to go, namely 2004 - 2009. However, last year, 2010, during the annual readjustment month of June, there was little change in the reported Chinese holdings or those of the UK for that matter.

We will have to wait for some time to verify this as the data is already 2 months behind and the annual readjustment is done during the month of June. Suffice it say that there has been an almost $200 billion increase registered in the UK holdings since June of 2010 to December 2010. That averages out to a bit more than $33 billion per month giving the UK the highest rate of increase in buying on an annualized basis than any other nation. Exactly how much of this is due to Chinese buying is uncertain.

No doubt there are more than a few observers who are greatly interested in seeing where this coming June's adjustment is going to place things. If we get a repeat of last year and little in the way of adjustments occur, that will not be particularly encouraging in regards to Chinese appetite for US Treasury debt especially considering that their overall rate of Treasury buying is declining. (see the chart below showing the drop off in the RATE at which they are buying). I should note here that I actually attach more sigificance to the rate of Treasury accumulation than to the overall holdings mainly because of the speed at which the US is cranking out these paper promises to pay.

The Fed is talking about unwinding the QE purchases when the program ends. With the sheer number of Treasuries that they have on their balance sheet, one has to wonder just whom they plan on selling all of those to should we see no noteworthy adjustments made this coming June to the Chinese account.