Hot Money and Cold Water

The question of China's role in the global economy and financial system is so complex that I should just turn it over to an expert. But first, a summary of the basic points that might be useful later:

1. China's reserve growth is slowing dramatically and is essentially at zero now, but ...
2. This is not because they are now running a trade deficit. In fact, though their exports are falling, their imports are falling faster and their trade surplus is growing. Bad news for the rest of Asia.
3. A growing trade surplus but no reserve growth means that the money is flowing out somewhere else. China has already stated that they are worried about "unusual swings in capital flows", which in this case means hot money flowing out of the country on the suspicion that they will devalue the Renminbi to support their exports.
4. None of this has any clear implications for the yields on Treasuries though. The money flowing out of China is going somewhere, after all, Sester thinks to Hong Kong and Taiwan, and thence, perhaps, to T-bills. In addition, China is moving their existing reserves away from risky assets and even agency debt, and into plain vanilla treasuries. And finally, the economy sucks and people are willing to buy treasuries now just to avoid losing money, so private demand is strong.