china to tell u.s. to cool yuan criticism

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    Reuters
    China to tell U.S. to cool yuan criticism--sources
    Friday August 8, 3:47 pm ET
    By Eric Burroughs and Gertrude Chavez

    NEW YORK, Aug 8 (Reuters) - Chinese officials plan to tell U.S. Treasury Secretary John
    Snow they might reconsider the country's hefty buying of Treasuries and U.S. 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 percent against the yen on Thursday.

    "Part of the (dollar)'s decline may have (also) been caused by rumors of a
    consultant's report that official Asian accounts will be less inclined to purchase
    U.S. 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 U.S. 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 U.S. mortgage financing agencies, Fannie Mae (NYSE:FNM - News) and Freddie Mac
    (NYSE:FRE - News), 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 U.S. 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 rumors 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 U.S. 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 U.S. interest rates, hurt the dollar and increase borrowing costs of Fannie Mae and
    Freddie Mac, not to mention the U.S. 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 U.S.
    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 U.S.
    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.

    Moreover, the latest Federal Reserve numbers on custody holdings for the week to August 6
    suggested the Chinese were not as yet big sellers. Data show that foreign central banks bought
    U.S. assets for the first week in four weeks, purchasing $6.2 billion of Treasuries.

    This is a marked turnaround from the previous three weeks where European central banks
    seemed aggressive sellers of U.S. assets, and appears driven by Asian central banks intervening
    in order to weaken their currencies against the dollar. (Additional reporting by John Parry in
    New York)
 
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