To understand the Internet, watch how rumors spread. Too many people evaluate stories by how well they match their preconceptions. Since few “nodes” on the Internet bother to check sources — or even care about sources — the Internet often makes us dumber. Today we examine a rumor spreading like wildfire on the Internet, on a subject of vital importance to America. A rumor with no visible basis in fact. But probably to be frequently cited as fact for many months, until eventually forgotten.
(1) The first story: “China Dumps US Asset Backeds and Corporates“, David Goldman, Asia Times, 9 February 2010 — Full text:
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take – Beijing does not mix investment and strategic policy – and would be hard to substantiate in any event.
Glenn Reynolds (the The Instapundit), apostle of good news for Bush — vacuum for bad news under Obama, circulates this by saying “HMM: China Dumps US Asset Backeds and Corporates.” Will he run a correction if this is shown to be false. Or will this be just another bit of fiction clouding the mind of his readers? {see his reply here}
About David Goldman: he was global head of debt research for Banc of America Securities and earlier global head of credit strategy at Credit Suisse. He was until July 2008 the strategist for a credit hedge fund, Asteri Capital, one of the few credit funds to show a profit between July 2007 and July 2008. He is now Associate Editor of First Things and a columnist (under the byline “Spengler”) for Asia Times Online. I consider him a provocative writer and one of our few original thinkers. But not a reliable source for this kind of information.
(2) The rumor spreads to more respected media: “China’s punishment, Treasuries’ pain“, blog of the Financial Times, 10 February 2010:
The European FX analysts at BNP Paribas seem to have confirmed the SAFE report:
“Dollar-denominated risk assets, including asset- backed securities and corporate, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest themselves of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events. Meanwhile, the Chinese military has urged the government to sell US bonds, boosting defence spending on Taiwan arms deal. Hence, we watch US spreads intensively. A widening of spreads would not bold well for share markets while putting economic recovery at risk. It was US liquidity feeding financial markets until January this year. Hence a decline of risk appetite suggests repatriation flows moving back into the USD.”
(3) The story hits the mass media: “China orders retreat from risky assets“, Ambrose Evans-Pritchard, Daily Telegraph, 10 February 2010 — Excerpt:
“China has ordered managers of its vast currency reserves to withdraw from risky dollar assets and retreat to core debt guaranteed by the US government, a clear sign that Beijing is battening down the hatches for fresh trouble on global markets. … A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to US Treasuries or agency mortgage debt such as Freddie Mac that enjoys Washington’s implicit backing.”
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar, including About the FM website page. Of esp relevance to this topic:
Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Also — you can now subscribe, receiving posts by email — see the box on the upper right.