Daily Commentary BY THE CURVE TEAM –

China Cut US Treasury Holdings Again

17th October 2018

The Chinese retail sharemarket, the Shanghai Index has fallen about 20% this year. The peak to trough fall from June 2015 is a monumental 50%. A Bloomberg article overnight reveals China may have USD $5.8 Trillion in hidden debt with “Titanic Risks”. Over 6000 Chinese Peer to Peer (P2P) loans portals have been wound up through insolvency or bad loan reportings. Lower equity valuations harbouring negative equity have ravaged domestic confidence. The Belt and Road strategy is deploying Chinese labour and capital in a wide range of potential growth economies outside China, but is this economically viable?

The Chinese economic success story seems to be taking on similar growth challenges that Japan experienced in the mid 1990’s. The fall of the Nikkei Index from 40,000 to 10,000 in a few short years provided enormous challenges to their banking system. The repatriation of capital invested in all countries of the world at that time was a foreign currency trend that strengthened the Yen all the way down to 78.

The story overnight that China has cut US Treasury holdings for the 3rd straight month has a parallel from the Japanese experience of 25 years ago. The Asian debt crisis of 1997 is a significant blue-print for current circumstances.

The substitution of Chinese ownership of US Treasuries by Brazil, Saudi Arabia and Ireland are a strong USD element. However an accelerating repatriation strategy to shore up the China Inc balance sheet could prove a valid reason for a trend toward a fast paced weakening of the USD if valuations in China require immediate triage.

Peter Sheahan

Director - Institutional Markets