17 Aug 2009

China Central Bank Diversifying Out of USD

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Tony Crescenzi reports on CNBC:

New data on international capital flows into U.S. financial assets were released Monday indicating that in June China was a net seller of $25.1 billion of U.S. Treasuries. Many will put the sale in the context of China’s $38 billion buying splurge in May, but the better metric is put the net purchases for May and June in the context of its $122 billion accumulation of international reserves during the two months. In other words, China invested very little of its new money in Treasuries in May and June—just over 10%, a sharp contrast to the 60% to 70% figures seen in recent years.

In total, China accumulated $177 billion of reserves from April through June, yet its net purchases of Treasuries were just $9 billion. In 2008, China’s reserves increased $418 billion and its net Treasury purchases were $250 billion, about 60% of the reserve accumulation. The recent pattern suggests China hastened its effort to diversify its international reserves, which totaled $2.132 trillion at the end of June. China, which has spoken openly about its diversification imperative, has put its money where its mouth is.

So let’s see… The US Treasury is going to be borrowing several trillion dollars over the next few years, just as the Chinese are backing off on further acquisition of US government debt. What does that mean for US interest rates?

I’m thinking they will go up, way up.

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