Key News
· A plan led by Germany and France to bail out Greece with as much as €30 billion ($41 billion) in aid began to take shape amid intense and risky jockeying between Athens and Berlin over timing and terms. (WSJ)
· Turcan Connell, which caters to rich families, expects the pound to lose between 20 percent and 30 percent against the dollar once investors turn their sights on Britain as the government sells a record amount of debt. Sterling slid to a 10- month low versus the U.S. currency today. (Bloomberg)
· The pace of Chinese manufacturing eased last month, suggesting slower government spending and steps to curb credit growth could be taking some of the steam out of the world's third-largest economy. (Reuters)
“It is a real toss-up as to which generates more bizarre comment in the international press: Beijing’s long-feared dumping of US Treasuries, or the use and value of the PBoC’s central bank reserves. The revelation last week that Chinese holdings of US Treasury obligations fell in December by $34.2 billion, to $755.4 billion, generated a frisson of fear and excitement, leading one prominent newspaper to worry that “If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.”
“And shouldn’t they get twitchy? After all this reduction in Chinese holdings of Treasury bonds comes from the USG’s TIC data, so it must be true that China is dumping dollars, right?
“No need to twitch, it means no such thing. First of all, the data from which this was derived indicates national ownership of USG bonds only to the extent that foreigners are directly registered holders. It says nothing about what happened to the large amount of bonds held by the PBoC and other Chinese investors indirectly or in street names. Those could have easily gone up by more than the reduction in bonds directly held by Chinese investors in their own name. If the PBoC had let maturing Treasury bonds get repaid, for example, and reinvested the proceeds into the USG bond market through another account, or in a street name, its total holdings would have actually increased even though its registered holdings would have declined.
“More importantly, the TIC numbers completely fail to disclose whether China’s reduced holding of USG bonds was matched by increased holding of other dollar assets, thereby increasing the pool of capital available to fund USG bonds by an amount equal to its reduced Treasury holdings. If Chinese investors decide to take on more risk, for example, they might sell USG bonds and use the proceeds to buy corporate bonds. Of course the seller of these corporate bonds will then have cash, which must be put to work, and ultimately this ends up back in the USG bond market.”
Source: www.babypips.com Michael Pettis
