Baffled by Belgium: Burst of U.S. bond-buying raised questions, eyebrows

China may be behind spree

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Call it the Great Financial Mystery of 2014.

The small European country of Belgium this year suddenly became the world’s third-largest foreign holder of U.S. Treasury bonds — putting it behind only financial giants Japan and China.


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The development has set Wall Street abuzz and inspired a raft of conspiracy theories among traders and analysts to explain what’s going on. Some say the Belgian buying spree is the work of worried European officials trying to prevent the Federal Reserve’s gradual tightening of interest rates from driving up rates in Europe. Others say it’s a subterranean effort by China to prop up the U.S. dollar and aid its ailing economy.

The mystery was spawned by a doubling of Treasury purchases emanating out of Brussels since August, which left the Belgian capital with an accumulated stash of Treasury bonds worth nearly $400 billion — more than double the amount it held through most of last year. The extra buying is equal to half of the country’s yearly GDP, or $20,000 for each of the country’s 11.1 million citizens.

The Brussels-based clearinghouse Euroclear has admitted that its clients — which include more than 90 countries and 2,000 financial institutions — were responsible for the purchases but would not say which clients were involved.

The cloak of anonymity provided by Euroclear set off whispers and speculation on Wall Street about why the surreptitious bond buyer or buyers are trying to avoid identification. Perhaps the most natural suspect that came to the fore was Beijing, which for years invested its massive $4 trillion foreign exchange surplus in Treasury bonds to drive up the value of the dollar and ensure Chinese exports remained cheap for its millions of American customers.

China is almost certainly disguising its Treasury purchases by holding them in Belgium,” said Benn Steil, analyst at the Council on Foreign Relations, who noted that China has bought U.S. bonds on the sly before through other offshore financial centers. By hiding its purchases, the Asian giant is trying to avoid setting off another firestorm of criticism on Capitol Hill that it was manipulating its currency, he said.

China’s practice of using its dollar earnings from the sale of exports to the United States to purchase Treasury bonds during the 2000s prompted widespread criticism from legislators and both the Bush and Obama administrations. They blamed China for using the technique to maintain a competitive edge in trade that led to lopsided trade surpluses with the U.S. Moreover, the bond hoarding was blamed for helping to create the credit bubble that caused the housing crisis and Great Recession of 2007-2009.


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The outcry in the last decade forced officials in Beijing to pare back the practice for several years. China’s suspension of heavy bond buying since 2009, as expected, caused the dollar to fall and sparked a strengthening of the Chinese currency to record high levels, prompting even some of China’s fiercest critics to say last year that the trade and financial imbalances caused by China’s currency manipulation had come to an end.

But the change also helped cause a dramatic slowing in China’s economy, and this year, a portion of China’s currency gains suddenly disappeared as a result. China insists that it is not resorting to old tricks and trying to artificially gin up the dollar and exports to boost growth. But observers note that its exports and trade surplus are ballooning once again, and the Treasury Department this spring warned that it is watching closely to see if China is backtracking on its promise of reform.

Sifting the evidence

Mr. Steil said the evidence is compelling that China has resumed its purchases of Treasury securities to engineer a decline of more than 3 percent in the Chinese yuan against the dollar this year, a move that assists Chinese exporters in their battle to maintain market share in the U.S and other global markets. But because of the political pressure in the U.S., China felt it had to act in secret.

“China’s central bank holds the key,” he said.

While China’s foreign exchange reserves are surging again, and because in the past the People’s Bank of China invested about 40 percent of those reserves in U.S. Treasurys, reports show that China’s official, publicly known holdings of Treasurys are in decline — something that just doesn’t add up, he said. The bank must be surreptitiously investing the surplus reserves through the Belgium clearinghouse, he said.

In one telling sign, China’s bond buying, as in the past, is having a substantial impact on U.S. financial markets, Mr. Steil said. He pointed out that the combined impact of Chinese and Belgian purchases of $59 billion of Treasurys in January alone was so massive that it could fully account for a mysterious decline in yields on 10-year Treasury bonds that month to 2.64 percent from 3.03 percent. The decline in interest rates was all the more puzzling because it came at the same time the Federal Reserve started to pare back its own massive purchases of Treasury bonds — a “tapering” that otherwise would have raised rates.

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