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High Probability Sovereigns to Hold Treasuries Despite Downgrade

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Sovereign wealth funds and other governmental investors will likely continue to hold positions in U.S. treasuries, at least in the short-run. Last Friday, Standard & Poor’s downgraded the United States, while Moody’s and Fitch Ratings affirmed their AAA status for the United States. This downgrade is unlikely to cause any mandatory sell-off of treasuries or massive dump by central banks, governmental pension funds, and sovereign funds since treasuries remain the most liquid asset. At this point in time, the United States is not facing the exact same dilemma that Greece is currently dealing with.

Around the globe, government officials publicly did not state there would be a massive sell off of treasuries from their respective countries.

From a practicality stance, treasuries remain safe as other major Western nations with sovereign debt issues are in similar or worse shape than the United States.

Asian countries are major holders of U.S. treasuries, especially China and Japan. Unlike Japan, in China there is a strong growing consensus from government officials of the need for the United States to curb its addiction on borrowing.

South Korea’s vice finance minister, Yim Jong Yong, told reporters in Gwacheon, “Our faith in U.S. Treasuries has not changed,” after a meeting with counterparts from the central bank and financial agencies.

Major Foreign Holdings of U.S. Treasury Securities in Billions – End of Period

Country May 2011 Apr 2011 Mar 2011 May 2010
China, Mainland 1159.8 1152.5 1144.9 867.7
Japan 912.4 906.9 907.9 784.8
United Kingdom* 346.5 333.0 325.2 350.7
Oil Exporters** 229.8 221.5 222.3 228.6
Brazil 211.4 206.9 193.5 161.5

Source – U.S. Treasury

* Includes Channel Islands and Isle of Man
**Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.

With all things being said, many countries with non-commodity sovereign funds have large allocations to treasuries. For central banks, this is a result to prevent the unwanted appreciation in their currency against the U.S. dollar. If their currencies appreciate over the U.S. dollar it would hurt their export competiveness. Already, Japan has indicated they are willing to intervene again after selling currency on August 4th. Asian central banks are not thrilled about the American downgrade, but they are willing to hold out.

Alibaba Invests in Series C in 1919 Wines

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On October 18, 2018, Alibaba Group Holding Limited, through Alibaba (China) Network Technology Co., Ltd, invested some 2,000,000,065.08 RMB (US$ 288,447,000) for 39,277,299 shares in a Series C round into 1919 Wines & Spirits Platform Technology Co., Ltd., a Chinese alcohol beverage e-commerce retailer. Post-deal, Alibaba owns about 29% of the company shares and became the second largest shareholder of 1919 Wines. The transaction values 1919 Wines at 7 billion RMB.

GF Securities Co., Ltd. advised 1919 Wines on the transaction.

Formed in 2010, 1919 Wines is based in Chengdu. 1919 Wines owns retail portals, phone apps, and offline stores.

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Nomura and CIC Contemplate Joint Investment Fund

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Japan-based Nomura Holdings is in talks with the China Investment Corporation (CIC) on forming a new investment fund. The fund could be receive commitments up to US$ 1 billion. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Temasek Holdings Dumps More of Celltrion

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On October 22, 2018, Singapore’s Temasek Holdings, through its sovereign wealth enterprise (SWE) Ion Investments, entered into its second block deal in selling shares in Celltrion, a South Korean bio-pharmaceutical company. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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