April 20 In what is a brief, albeit fairly complete, rebuttal, Mr. Neely has omitted the circumstance wherein Mainland China, or any other consistently large purchaser of US sovereign debt, either reduces the amount of its purchasing substantially or refuses to purchase any at all.
Throughout the year 2004, the net of Mainland China transactions in US Treasury notes and bonds was $18.9 billion, which is a 37 percent reduction in the total for 2003. The net of transactions for Japan resulted in a 10 percent increase over the net purchases of 2003, which was greater by $7 billion than China's reduction.
The other of the three largest net buyers, the United Kingdom, increased its purchasing by 220 percent in 2004. However, in that London is a major financial center and the way in which transactions are recorded, it may be supposed that not all of the purchasing was accomplished by official parties or domestic residents of the UK. Still, the UK purchasing was only half that of Japan.
The dollar index trended higher through the first calendar quarter of 2004 and into the start of the second quarter, a period within which the Japanese corporate fiscal year ends; much was the same this year. The scenario does of course involve Japanese banks purchasing US dollars on behalf of the Finance Ministry, a large portion of which is then recycled into US Treasury debt.
Japan's heavy purchasing of T-notes and bonds in Q1/2004 entirely overwhelmed transactions that resulted in a net sale of $5.7 billion by China. As mentioned, the US dollar traveled higher. US interest rates fell. Such was not the same, thereafter. The US dollar moved lower as Japan cut its currency intervention; and rates moved higher as purchases of Treasury debt by Japan fell by more than half.
China turned to a net purchaser of Treasury debt after Q1/2004, yet the amounts were comparatively small and inconsequential.
Japan's purchasing in Q2 and Q3 was less than Q1, yet on par with the significant amounts in the same periods of 2003.
Then came Q4/2004, when Japan's net purchasing of official US debt was cut by nearly 70 percent, and in stark contrast to the heavy purchasing in the same period of 2003. News reports at the time were that Japanese officials were arguing whether or not the Bank of Japan could afford and should continue as it had with regard to its currency intervention. The dollar exchange rate fell anew, and rates began moving higher yet again.
The offshore centers in Bermuda and the Bahamas were also substantial actors in Q4/2004, combining for transactions that resulted in net Treasury debt sales of $38 billion.
The truth of the matter is that Beijing has not been a strong purchaser of US Treasury debt for at least the past two years. Rather, it has been Japan moving the dollar forex and interest rates.
In consideration of all the above, you might ask why we see or hear so much of China's enormous dollar-based reserves. Where US Treasury paper is concerned, the answer is that purchases by China and Japan were about on par with one another prior to 2003. China, in fact, purchased a greater amount of US sovereign debt than did Japan in 2001. But, the Fed lowered the real rate for overnight funds to negative late in 2002. The dollar index then peaked, and China began backing away.
So, it is an impact issue when a large and former client reduces its interest in our debt, leaving another, whether it wishes to or not, exerting influence on our current circumstances. And Mr. Neely's argument is somewhat after the fact.
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