Quatro equis

Yanks along the Mexican border will be familiar with that drinkable beer, XX (Dos Equis). Goes down extremely well with MexTex food.

In Queensland, they used to have a regional beer called XXXX (four x), before it was taken over by and standardised with national and international brands. People south of that border (e.g., NSW) delighted in the joke, "you know why they call it 'XXXX'? Because the Queenslanders can't spell 'Beer'."
Yuk yuk.

But the topic of this post is not quite beer, although it is forex.

The whole fabric of the low interest, consumer led goldilocks US economy, and to that extent the world economy, has been hung on the willingness of lender countries, mainly the Mid East oil producers and the cheap product vendors of Asia, to keep on buying US treasuries. While the fear of that little game coming to an end has been voiced by the usual scardycats, the music has played on and the dancers danced along, not paying attention to those on the sidelines who had it within their power to pull away the chairs. We were told, they wouldn't do it because it is not in their interests.

Well, it is not as if they aren't thinking about it, and that got reported today with sobering effect. The US and US block dollars fell away. And what was the source of this near panic?

USD/JPY fell further in relatively light Asian session trading on the back of comments by a senior Chinese parliamentary official that China should gradually reduce its holdings of USD denominated debt. A report in Wen Wei Po a Beijing backed Honk Kong newspaper made those comments public at the start of Asian trade which caused selling in USD/JPY to accelerate as traders speculated that China may curb its future purchases of US Treasuries. The nation has been accumulating foreign reserves at a rate of $50 Billion per quarter and has become the second largest holders of US assets in the world. Later in the day however PBOC distanced itself from the statement by Cheng Siwei by noting that his words expressed his own academic view rather than a material change in the Central Bank’s FX management policy. As a result the USD/JPY stabilized at 117.60 but was still down on the session from the 117.80 close in New York on Monday.

Yen Gains on Worries Over Chinese Diversification

China’s Vice Parliamentary Chief, Cheng Siwei was quoted in a Hong Kong newspaper on Tuesday, saying China should reduce holdings of US Treasuries and can stop purchasing dollar-denominated bonds. He also said that the government should widen the yuan’s trading band at the appropriate time. Subsequently, China’s central bank issued a statement saying the Parliamentary official’s comments on forex reserves were his own views and not reflective of the government. Any evidence of China reducing its US Treasury reserves could trigger a dollar sell-off since China’s US Treasury reserves are second only to Japan’s at $262.6 billion as of last month.

http://www.forexnews.com/NA/default.asp?f=N20060404B.mgn

China should trim its holdings of U.S. debt and can stop buying dollar bonds, a vice chief of the national parliament said, rattling markets on Tuesday, weeks before President Hu Jintao visits Washington.

As China is a leading financier of the U.S. current account deficit and holds the world's largest foreign exchange reserves, the comments from Cheng Siwei sent the dollar lower against the euro and yen and pushed U.S. government bond prices down.

The comments could add to the contentious issues that will come up during Hu's visit, notably what some U.S. politicians and companies see as currency manipulation by China, accused of holding down the yuan to gain an unfair trade advantage.

Hong Kong's Beijing-funded Wen Wei Po newspaper carried Cheng's comments, made in Hong Kong on Monday.

"China can stop buying dollar-denominated bonds, increase buying of U.S. products and gradually reduce its holdings of U.S. bonds," the newspaper quoted him as saying. "But all these must follow the prescribed order," he said, without setting out that sequence.

An official at the central bank said this was merely Cheng's personal opinion and a reporter present for the speech said Cheng had stressed he was expressing his own views.

"The comments only reflected his academic view. The People's Bank of China has been studying issues regarding the management of foreign exchange reserves," the central bank official told Reuters.

Cheng is one of more than 10 vice chiefs of the parliament, as well as chairman of the China Democratic National Construction Association, one of eight minor political parties loyal to the Communist Party.

His rank is equivalent to vice premier, outranking cabinet ministers, and he often speaks on economic issues, but he does not exercise direct control over government policy.

"Cheng Siwei is a scholar and at the same time a national leader," said Zhang Zuhua, a former official familiar with the workings of the government. "He often expresses his views as an expert, and doesn't just give bureaucratic talk.

China official urges cut in US debt holding

It doesn't take much movement along a fault line to make a rather large earthquake.