August 10, 2003	Sunday	Jumadi-us-Sani 11, 1424

NEW YORK, Aug 9: Chinese officials plan to tell US Treasury Secretary John Snow they might reconsider the country’s hefty buying of Treasuries and US agency debt if Washington doesn’t cool its calls for China to revalue the yuan, according to a report this week seen by market sources.

This week, the currency market buzzed with speculation about the report, which is sent only to paying subscribers and which was one factor behind the dollar’s dive of more than one per cent against the yen on Thursday.

“Part of the (dollar)’s decline may have (also) been caused by rumours of a consultant’s report that official Asian accounts will be less inclined to purchase US Treasuries,” strategists with BNP Paribas wrote in a research note on Friday.

The report, by geopolitical advisory group Medley Global Advisors, quotes Chinese officials saying they will reiterate that they have not sold any Treasuries or agencies and have in fact continued to buy those securities, sources said.

But unless the US calms its criticism, Chinese officials plan to tell Snow during an expected visit this year they may reconsider their purchases of Treasuries and the debt sold by the two biggest US mortgage financing agencies, Fannie Mae and Freddie Mac, market sources quoted the report as saying.

Those steady purchases from China and other Asian countries have helped bolster the dollar and keep a lid on long-term US interest rates.

Medley declined to comment on any reports issued to clients.

“We do not publicly comment on our reports. We have been covering the topics of Asian interest in Treasuries. Yesterday’s rumours seem like a hotchpotch of different stories, combined with violent market action,” said Sassan Ghahramani, senior managing director, Medley Global Advisors in New York.

China, Japan and other Asian countries are all big buyers of Treasuries and agencies as a way of keeping their currencies weak to the dollar, thereby boosting exports. The countries often funnel dollars coming in from their trade surpluses back into Treasuries and agency debt.

Through May, Japan and China were the two largest holders of US Treasuries, with $428.6 billion and $121.7 billion respectively, according to Treasury data.

Total Treasuries and agencies owned by foreign central banks stand at a staggering $935 billion, and most of those belong to Asian central banks.

Any slowdown in those purchases or even outright selling would almost certainly drive up long-term US interest rates, hurt the dollar and increase borrowing costs of Fannie Mae and Freddie Mac, not to mention the US government.

Snow’s recent repeated calls for China to revalue the trading band of the yuan has been widely seen as a political move as the Bush administration attempts to calm the ire of struggling US manufacturers heading into next year’s presidential election. In late July Snow brought up the yuan revaluation at a manufacturing plant in Milwaukee, Wisconsin.

Despite the pressure, China is believed to have little desire to widen the yuan’s trading band and let it strengthen against the dollar.

China has pegged its exchange rate at 8.28 to the dollar since 1998 and this has made Chinese exports cheaper than their foreign counterparts.

Most currency traders are skeptical of the Medley report’s hints that Chinese buying of US fixed income might cool.

One New York-based currency trader, who asked not to be named, said it is not in the interest of China to change policy at this stage.

Another New York-based trader said the massive current account surpluses of Japan and China leave them few options other than to recycle their excess dollars into Treasuries.—Reuters