..
Brad W. Setser is an American economist. He is a former staff economist at the United States Department of the Treasury, worked at Roubini Global Economics Monitor as Director of Global Research where he co-authored the book “Bailouts or Bail-ins?” with Nouriel Roubini, as a fellow for international economics at the Council on Foreign Relations, for the United States National Economic Council as Director of International Economics, for the United States Department of the Treasury, and as Deputy Assistant Secretary for International Economic Analysis as senior fellow for international economics at the Council on Foreign Relations. Wikipedia
Education: Harvard University, University of Oxford
..
Michael Pettis is an American professor of finance at Guanghua School of Management at Peking University in Beijing and a nonresident senior fellow at the Carnegie Endowment for International Peace. He was founder and co-owner of punk-rock nightclub D22 in Beijing, which closed in January 2012. Wikipedia
..
China Isn’t Shifting Away from the Dollar or Dollar Bonds
China’s reserves has shifted its dollar reserves from Treasuries to Agencies, and made increased use of offshore custodians. The available evidence suggests that it still holds about 50% of its reserves in dollar bonds.
Blog Post by Brad W. Setser
October 3, 2023 10:09 pm (EST)
..
1/9 For all the excited talk, As Brad Setser explains here, it is extremely unlikely that China is reducing its holdings of US Treasury bonds, except to the extent that it is swapping Treasury bonds for Agency bonds.
2/9 “The only interesting evolution in China’s reserves in the past six years,” he argues, “has been the shift into Agencies. That has resulted in a small reduction in China’s Treasury holdings – but it also shows that it is a mistake to equate a reduction…
3/9 in China’s Treasury holdings with a reduction in the share of China’s reserves held in U.S. bonds or the U.S. dollar.” More generally it is very hard to square the idea that China is reducing its holdings of USD bonds with the basics of the balance of payments.
4/9 China has the largest trade surplus in the world, which is another way of saying that it is the largest acquirer of claims on foreign assets in the world. With the largest trade deficit by far, the US is the world’s largest supplier of claims on its own assets.
5/9 Given how limited China’s investment in developing countries has been, and how rapidly it is declining, China is clearly not converting a large share of its trade surpluses on claims on developing-country assets. Even less goes into gold.
6/9 So what else is there? Mainly claims on the assets of Japan, the EU and the other Anglophone economies, which suggest that China’s desire to protect itself from western-imposed sanctions won’t easily be satisfied by diversifying out of US assets.
7/9 What is more, if a swap out of US assets and into those of Japan, the EU and the other Anglophone economies were happening to any large extent, we would probably see it in the form of a weakening USD and strengthening Euro, sterling and yen.
8/9 The basic point is that China’s claims on foreign assets is rising substantially every year. It is possible (though unlikely) that the USD share of total claims is declining, but it is extremely unlikely that total USD holdings are declining. That’s not how the B-o-P works.
9/9 Setser’s very good blog entry explains why we need to think far more carefully about China’s USD holdings than equate it with direct PBoC holdings of US Treasury bonds, but I suspect it won’t make much of a difference. It’s far more exciting to propose wild scenarios.
..
..
weehingthong 