“Selling some of its equities is a reasonable way of raising the cash needed to finance the big drawdown in reserves,” said Setser, a former deputy assistant secretary for international economic analysis at the Treasury.
The PBOC’s press office directed questions to the State Administration of Foreign Exchange, the arm of the central bank that manages the nation’s reserves. Officials at SAFE didn’t respond to a request for comment.
Market Sliver
While the amount China unloaded is a sliver of the $23 trillion U.S. equity market, it’s significant when compared with holdings of other big investors. The largest American mutual fund, the Vanguard Total Stock Market Index Fund, oversees about $373 billion.
The Treasury doesn’t break down its data into private and
official holdings. Yet China’s capital controls limit the
candidates capable of amassing such a hoard of U.S. equities.
Also, private Chinese ownership of foreign stocks remained
stable in 2015, signaling that the selling originated from an
official source, SAFE data on international investments
indicate.
Given that China’s private holdings of equities abroad are smaller than the nation’s U.S. holdings as reflected in the Treasury tally, “one can reasonably infer that SAFE, whose reserve assets are not included separately in the net international investment position, holds many of the equities," Setser said.
Turmoil Buffer
Switching to selling stocks allows the PBOC to retain safer, more liquid assets such as Treasurys that it can unload easily in times of turmoil. Two rounds of declines in the yuan in the last 10 months spurred market volatility worldwide and led investors to monitor China’s reserves as a measure of how much of its war chest the country was burning through to combat capital flight.
Dumping equities may prove to be a savvy move, considering that the S&P 500 Index has gone 13 months without a new high on a closing basis. China, which more than doubled its holdings of U.S. stocks during the bull market that began in 2009, wouldn’t be alone among government-affiliated sellers of investments abroad. Sovereign funds from Qatar to the United Arab Emirates and Russia have been liquidating assets since crude began tumbling in 2014.