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Massive Buying of JGBs by China contributes to Yen Appreciation making Japanese see Red

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China has the world’s largest foreign reserves of approximately $2.5 Trillion of which 70% are held in Dollar Assets.With the recent US troubles and slow decline in value of the USD,China has been trying to diversify away from the Dollar.However there does not exist any deep market for any other currency or asset for China to move into quickly.The Chinese authorities instead have been steadily decreasing their US asset purchases and moving into other hard assets and currencies.While China has been on a buying spree in commodities in the last 2-3 years or so,it has now started hoarding Asian Currencies as well. In the last few months,Chinese purchase of Korean Won and Japanese Yen have been sharply higher than before.This has made these countries uneasy since currency appreciation leads to decreasing terms of trade for them.Japan has been particularly been hit hard as its currency has made a 15 years high against the Dollar.The Ministers and the Central Bank have been thrown into a tizzy as the Japanese Export Machine takes a big hit everytime the yen appreciates.With talks of Government Intervention failing to cap the rise in the price of yen,Japan has found itself in a tough situation.

Heavy in dollars, China warns of depreciation – Reuters

China on Friday offered a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly allocated in dollars, while a central banker said the mountain of cash could face depreciation risks.The Chinese government’s currency reserves, the world’s largest such stockpile at $2.45 trillion (1.59 trillion pounds), are held roughly in line with what was described as the global average: 65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen.

There have been signs in recent months that Beijing has stepped up the pace of diversification of its foreign exchange reserves away from dollar assets.Chinese net buying of Japanese debt has surpassed 1.7 trillion yen this year, far surpassing its record of 255.7 billion yen in 2005.China has also raised holdings of South Korean bonds by 2.48 trillion won ($2.11 billion) in the first seven months of this year from 1.87 trillion won at the end of last year. However, Chinese investors only started buying South Korean bonds in the middle of 2009.

At the same time, China has slightly cut back its vast holdings of U.S. Treasuries, from $894.8 billion at the start of the year to $843.7 billion in June, according to the most recent data. China remains the biggest single holder of U.S. government debt.

China’s Buying of JGBs makes Japan see Red

One of the factors behind the Yen Rise  is the Chinese record buying of Japanese Government Bonds (JGBs).The Japanese Finance Minister has become concerned as the Japanese cant reciprocally buy Chinese Government Bonds which are not freely traded.Note Japan has a huge government debt load of around 200% of Japans GDP which is mainly financed by domestic investors.China with its humongous Foreign Reserves is the biggest player in the Foreign Exchange Markets Today.The Chinese have come under fire over their currency manipulation with the recent market reforms on the yuan being cosmetic in nature.China is coming under pressure again to appreciate the yuan which some think to be 40% undervalued to the USD.However China remains reluctant to reform its currency as it too depends heavily on exports to prop its economy.Things are fast coming to a head with growing unemployment concerns in the USA.The German Export Machine is Firing on all Cylinders exacerbating the global imbalances.

Japan Plans to Seek Discussions With China on Bond Purchases – Businessweek

Japan’s government said it will seek discussions with China over the nation’s record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery.Japan is closely watching the transactions and will seek to maintain close contact with Chinese authorities on the issue, Vice Finance Minister Naoki Minezaki told lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the same hearing that it’s inappropriate for China to buy Japan’s bonds without a reciprocal ability for Japanese to invest in China’s market.The comments indicate communication gaps between Asia’s two largest economies even as their trade links deepen, with Noda reiterating he doesn’t understand why China is accumulating the securities. The purchases may help Japan finance the world’s largest public debt load, while at the same time contribute to demand for yen that’s propelled it to a 15-year high.

PG

Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in or call me on +913340606492.

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