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.
China’s investment in Treasuries in recent months looks even smaller when data for April are included. In April, China accumulated over $55 billion of international reserves, yet it was a net seller of $4.4 billion of Treasuries. While the maturation of T-bills could explain some of what happened (foreign holdings of Treasury bills increased sharply beginning last summer, from about $225 billion to a peak of $586 billion in May, and China was in fact a net accumulator of about $40 billion of long-term Treasuries in April through June--a healthy clip, implying it sold or let mature some of its T-bill holdings), the net figures will get a good deal of attention. Moreover, foreign holdings of bills on the aggregate fell only $14.5 billion in June.
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.
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Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."