Is China Dumping U.S. Treasuries?

According to research from several sources, as well as market data, it looks as if China, the largest holder of US government debt, is dumping Treasuries at an alarming rate, in an attempt to support the yuan.

Following the surprise devaluation of the yuan two weeks ago, the People's Bank of China has been selling dollars and buying yuan to support the yuan's exchange rate. Figures suggest that this policy has cost the Chinese central bank $315 billion in foreign-exchange reserves over the last 12 months.

Treasury yield curve

It's estimated that a continuation of this policy to support the yuan will cost China's central bank $40 billion a month for the rest of the year. The PBOC has a total foreign-exchange reserve stockpile of $3.65 trillion. According to the latest Treasury data and data compiled by Bloomberg, China controls $1.48 trillion of US government debt. $200 billion of this total is held in Belgian Chinese custodial accounts.

Growing speculation

Speculation that China is liquidating some of its US government debt started to gain traction this week when bond king Bill Gross tweeted on Janus Capital's Twitter Inc (NYSE:TWTR) account Wednesday “China selling long Treasuries ????”.

Is China selling Treasuries?

According to analysts at Société Générale, China has liquidated more than $100 billion in Treasuries during the past two weeks. However, it should be noted that this figure is based on an estimate of how much liquidity will be added to China’s financial system through Tuesday's reduction of interest rates and lenders' reserve-requirement ratios.

Nevertheless, according to some analysts the relative stability of Treasury yields during the past week, a week which has seen a significant drop in stock prices, is a sign that China is influencing the market through its massive Treasury liquidation.

Treasuries: No sale

Analysts over at Cornerstone Macro aren't convinced that China is offloading its Treasuries, according to a research note sent to clients this morning.

While both Chinese foreign-exchange reserves and Treasury holdings have declined recently, this isn't a new trend. What's more, Cornerstone doesn't believe that Chinese Treasury sales will increase (other analysts have predicted that sales will increase, leading to a significant dislocation in the Treasury market) as the country still has a current account surplus, which can be used to support the yuan.