It has been exactly a century since the small country of Belgium was the subject of a furious international debate. Now, for those who watch international capital flows closely, one recent development that has sparked a much more pedestrian debate has been the remarkable increase in the size of Belgium’s US Treasury holdings over the past 18 months (current holdings are about 70% of Belgian GDP). A recent paper by two Fed economists helps solidify what has become somewhat of a stylized fact: the increase is due to a shift in custody of China’s large Treasury holdings.
On the Belgian issue, Carol Bertaut and Ruth Judson, director and economist, respectively, of the Global Financial Flows section at the Fed (which includes the administration of the TIC survey), write: “A likely interpretation of such sporadic sizable increases is that … the large increases reflect shifts in custodial holdings from a custodian outside of Belgium to one in Belgium.” Later in the paper, when expounding on China, they write: “One possible interpretation of the negative gaps [in the attribution of holdings to China] is that these decreases reflect custodial shifts from a U.S.-based custodian to one abroad.”
The upshot of all of this is that the authors are indirectly implicating China as the cause of the marked increase in Belgian holdings. Of course, any country could be shifting the custody of their holdings to Belgium, but given that no other country operates at the magnitudes that China does (except Japan, whose public pension fund reports its portfolio allocation), this just leaves China as the likely source.
Change in China’s and Belgium’s US Treasury Holdings vs. Change in China’s Headline Forex Reserves
Source: People’s Bank of China, US Treasury