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How China Trades US Treasurys When It Wages Currency War

Ever wondered how a nation wages a currency war? As Reuters reports, Chinese state-owned banks were selling dollars on behalf of the central bank to stabilize the yuan around 6.43 against the dollar on Wednesday, foreign exchange traders in Shanghai said, as the devaluation collapse got a little out of hand. This follows wholesale dollar-asset buying to weaken the Yuan. But that leaves the question, how did they get the dollars? As the chart below shows, by trading Treasuries...

 

 

As the chart shows, when China wants to weaken the Yuan, it funds US Treasury purchases by buying USDs; when China wants to strengthen the Yuan, it sells Treasuries, receives USDs and sells the USDs for Yuan...

The bottom line is that if one expects China to continue to allow the Yuan to depreciate, then Treasury yields will continue to tumble.

Charts: Bloomberg