There’s this notion going around that since the Fed buying Treasurys was QE, therefore China selling Treasurys constitutes monetary tightening.

Nope. The root cause of the disequilibrium and resulting capital flows is capital flight from China to the US.

An oligarch wants to buy a condo in New York. He takes yuan to the Chinese central bank and exchanges them for USD. In order to provide the dollars, the Chinese central bank sells some Treasurys.

How can capital rushing into US risk assets be ‘quantitative tightening?’ It’s the opposite. At the end of it, the Chinese foreign sector has exchanged an American safe asset, a Treasury, for a condo at 432 Park, a risky asset. The US has built a big building, generating jobs, demand, maybe a little inflationary pressure.

The Chinese central bank could do nothing, and the yuan will drop until US assets look expensive to Chinese oligarchs and equilibrium is restored.

Or they could intervene to limit the drop in the yuan by buying yuan for dollars, which requires them to sell Treasurys.

The sale of Treasurys is a second-order reaction to partially stem the drop in the yuan and accommodate capital flight. At the end of it, at best, it’s an even swap of Treasury bonds for condos.

It’s possible that a central bank might sell Treasurys to buy non-US assets, gold, etc. In the case of the Saudis selling reserves to support their local economy, pay for imports from a lot of places, there might be some ‘quantitative tightening’, ie capital flight from US assets.

In China, though, it seems that the sale of Treasurys is a second-order effect from flight into US assets.

It’s a good principle in life and in economics that second-order effects partially offset first-order effects. It’s more probable that on balance, the capital flight from China into the US is a stimulus, and the Chinese FX intervention and sale of Treasurys partially offsets that stimulus.