After the devaluation of its currency two weeks ago, China has decided to sell a part of its assets in US Treasuries in order to raise the funding necessary to support its currency.
Through direct sales by China, as well as through agents in Switzerland and Belgium, the People’s Bank of China has been gathering and selling dollars in order to buy yuan. This effort, intended to support the exchange rate, has contributed to the significant drop of $325 billion in China’s foreign-exchange reserves over the last year.
According to a Bloomberg’s survey China’s foreign reserves totaling approximately $3.65 trillion will go down by around $40 billion per month for the reminder of the year due to the intervention.
Earlier sales by China of Treasuries were easily absorbed, and even after the news that further sales could be pending, two year Treasury yields barely changed at 0.67% as of Thursday noon in London. Longer term ten year yield fell by three basis points to 2.15%, close to the average for the past month.
Exchange Rate Effect
Despite the sales, China is still the biggest holder of US Treasuries by far, controlling an estimated $1.48 trillion of U.S. government debt. The number includes the close to $200 billion held through Belgium, where China keeps significant custodial accounts. The People’s Bank of China has already sold nearly $106 billion of its reserve assets in the last two weeks which included Treasuries to replenish its depleted reserves by buying yuan in order to stabilize the currency.
The move worked, as the yuan rose to 6.4053 per dollar or 0.08% on Thursday in Shanghai, reducing the month’s decline to 3.1%. Daily fluctuations have been minimal and have averaged under 0.1% in the past two weeks as the state bank intervened in order to bring stability after the devaluation on August 11.
China’s Treasury holdings will stop depleting as the intervention slows down and the currency returns to a more balanced trading range, but in the meantime there may be an opportunity to get some Treasuries at a discount as more get released onto the market.