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Fine tuning China, India’s forex portfolio

February 22, 2010

China and India’s recent ebb in  US Treasury bill holdings hasn’t shocked forex analysts, who have been watching the developing nations juggle a few billion dollars every now and then like prudent investors.

China does shuffle its U.S. dollar assets around from time to time. December may have been one of those months. Even if it has pared down its Treasury holdings a little, they are still massive. It’s not a signal that the dollar is on the way out with Beijing , Rosalind Mathieson the Dow Jones Asia-Pacific Editor for News commented on China moving from 1st to 2nd place on list of countries that held the most US Treasuries.

Another reason global forex watchers are not worried about the impact of China’s holdings in America is because the US T-Bond market which is accustomed to monthly swings, clouds in obscurity the true holdings of Central Banks. As a result many feel that while China and India’s central banks pulled substantial money out of the US market, they could have invested the same through large financial offshore accounts.

Last week the US Treasury International Capital (Tic) data showed that China’s holdings fell by US$46.1 billion from an all time high of US$801.5 billion in May 2009 to US$755.4billion in December 2009.  India’s holdings fell by US$9.3 billion from US$38.9 billion in July 2009 to US$29.6billion in December 209.

Dealers believe China and India may have instead made significant purchases in the past year through Hong Kong and London. Treasury holdings by Hong Kong rose to US$152.9 billion in December 2009, up from US$77.2 billion in December 2008. Similarly UK holdings of Treasuries also surged, reaching US$302.5 billion in December, from US$130.9 billion in December 2008.

Another reason analysts give for the fluctuation in US T- bonds is China and India are fine tuning their portfolio’s post the financial crisis, moving from short-term bonds to longer term bonds. China for example has used some of the proceeds of T-Bills that matured to buy longer terms bonds, showing their continued confidence in the US market and dollar as a global currency.

During the financial crisis, China built up holdings of short-dated T-bills from US$14 billion in mid-2008 to US$210 billion by May 2009. It is now back around US$70 billion.

“The latest data is consistent with them shrinking the T-bill mountain rapidly, although there is more to come, as the likely underlying desirable holdings of T-bills is probably nearer US$20 billion,” Alan Ruskin, strategist at RBS Securities, told the Financial Times.

In order to rule out any further doubt that India or China will pull out of US T- bonds, forex watchers explain how the developing nations would be shooting themselves in the knee if they withdrew support of America’s debt.

If China or India substantially reduce holdings in US treasury bonds, interest rates in the US will rise, strangling the US economy,  damaging the economic recovery and killing exports to America. This in turn would reduce the value of India and China’s T-Bond holdings, industry watchers explained.

Gerald Lucas, senior investment adviser at Deutsche Bank who also spoke to the Financial Times drills the final nail in the coffin of doubt, “So long as China’s currency is pegged to the US dollar, they will need to recycle their trade surplus dollars back into US assets”.

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