A recent article by Benn Steil and Dinah Walker on the Council on Foreign Relations Website suggests that all is not as it seems in the U.S. Treasury market. They claim it is pretty obvious that China is buying US. Treasury bonds and setting up accounting fronts and holding U.S. bond purchases in Belgium. Analysts say that the Chinese government doesn’t want to admit it’s still buying large quantities of U.S. Treasuries to keep the renminbi down and stimulate its flagging economy.

The secret is out

Furthermore, Steil and Walker claim China’s bond obfuscation is really not a secret any longer. In fact, Brussels-based bond clearinghouse Euroclear has said it may be responsible for the huge increase in U.S. Treasuries held in Belgium over the last year or so. This would explain why relatively small Belgium has moved up to become the world’s third largest holder of U.S. Treasuries over the last few quarters, behind only China and Japan.

Moreover, the reasons for China’s central bank to intervene are obvious — after over three years of currency appreciation, the renminbi has tumbled over 3% in 2014, and the decline was becoming a notable drag on Chinese economic growth.

The reasons for China’s central bank to disguise their U.S. bond purchases are equally obvious — they get push back from the white House or Congress every time they take steps related to lowering the value of the RMB.

Explanation for recent “confused” U.S. bond and stock markets

According to Steil and Walker, “China and “Belgium” bought a massive combined $59 billion in Treasuries in January, a month in which the supply of Treasuries actually shrank by $42 billion. This would almost surely explain a large part of the decline in Treasury yields that month from 3.03% to 2.64%.”

They also argue that it’s quite likely the “confused signals” in U.S. markets (ie, both bond and stock markets going up at the same time) over the last months have been caused by China’s stealth efforts to push down the RMB by buying U.S. bonds and stashing them in Belgium.

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