from Zero Hedge:
Back in May, this website was the first to explain the “mystery” behind Belgium’s ravenous Treasury buying which in early 2015 had turned into sudden selling, and which we demonstrated was merely China transacting using offshore Euroclear-based accounts to preserve anonymity. Since then theme of Belgium as a Chinese proxy has become so popular, even CNBC gets it.
Consequently, we were also the first to correctly warn that China had begun liquidating its Treasury holdings (a finding which left none other than Goldman “speechless”), which also helped us predict that China is about to announce its currency devaluation three days before it happened as the conversion of Chinese reserves from inert paper to active dollars hinted at a massive effort to stabilize the currency, and thus unprecedented capital outflows.
As a result, the only data point which mattered in yesterday’s Treasury International Capital data release was not China’s holdings, which actually “rose” $1.7 billion in the month when China actively devalued its currency and then spent hundreds of billions to prevent the devaluation from becoming an all out FX rout, but the ongoing decline in Belgium holdings. As the chart below shows, Belgium, pardon Euroclear – which is a clearing house not only for China but many other EM nations who park their reserves in Belgium – sold another $45 billion in Treasurys last month, bringing the total to a dangerously low $111 billion, down from $355 billion at the start of the year.
Lumping Belgium and China holdings into one, as we have done since May, shows that as expected, Chinese selling continued in August, and the result was another drop of $43 billion in TSY holdings in the month of August, which incidentally mirrors perfectly the previously announced decline in September Chinese FX reserves, which according to official data declined from $3.557 trillion to $3.514 trillion.
According to the chart above, while to many Quantitative Tightening is a novel concept, the reality is that China (+ Euroclear) have been dumping Treasurys and liquidating reserves since January when total holdings peaked at $1.6 trillion last summer, and have since declined to $1.38 trillion. It means that China has sold a quarter trillion dollars worth of Treasurys in the past year, in the process offsetting what would have been about 25% of the Fed’s QE3.
However, the real number is likely far greater.
While China’s official (declining) FX reserve data (a real-time mirror of the TIC data from China’s perspective) is a useful guide to what is happening with China’s reserves (primarily US Treasurys, as well as European sovereigns and various other unclassified assets), it is also manipulated by the politburo which does not want to give an overly pessimistic picture of what is happening in China. As a result, a far more accurate representation of FX flows comes from the data showing FX purchases for the whole banking system (PBOC plus banks), as this number is far more difficult to rig.
As we previously reported, in September FX purchases decreased by US$120 billion in September (vs. a decrease of $115bn in August). This is a troublin discrepancy with both official Chinese reserve data and US TIC data as the scale of decline in this data is significantly larger than that in PBOC’s FX reserves (-$43bn) and its foreign assets (-$42bn), suggesting that banks have resorted to their own spot FX positions to help absorb outflow pressure.
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