Please consider the following pair of Bloomberg articles.
China Weighs Slowing or Halting Purchases of U.S. Treasuries
Chinese Caution on U.S. Debt Clouds Financing for Trump’s Tax Cut
The amount of mistaken hype over the years on this subject has simply been staggering.
Here are some Tweets from today.
Historic Headline Not
Mathematical Certainty
The US runs a trade deficit. As a mathematical certainty nations who perpetually run surpluses with the US accumulate US assets. Foreign countries do not hold dollars they hold treasuries.
From time to time countries may use those dollars for things like halting capital flight to prop up the Renminbi.
Countries may also buy other US assets. China would probably love to buy Boeing for example, but Congress would surely block such an attempt.
Meanwhile, as long as the US runs a deficit with China and Japan, China and Japan are going to keep buying US treasuries or other US assets. It’s a mathematical certainty.
The Vise
Any alleged “vise” is a two-way street. The US gets cheap goods from China and China accumulates US treasuries. If, as some claim, “China is dumping below cost goods into the US”, then as a matter of mathematical certainty the US consumer has benefited at the expense of China.
Some might argue that China will or should “dump treasuries.” To whom? How? Let’s see the math.
Someone must hold every treasury issued 100% of the time, and creditors mathematically must accumulate US assets of some sort as a result of trade surpluses.
For political purposes Chinese officials may make any statements they like. Bloomberg ought to point out the fallacies in them, but instead hypes them up, and people retweet them as if they are accurate.
Mike “Mish” Shedlock
-> ace33, your point is well illustrated. I have read Mish’s same explanation over the years about China UST purchase vs US deficit is a mathematical axiom, but I am always confused WHY? China can certainly dump UST to acquire foreign companies, loan UST to build infrastructure (Silk Road) and expect payment back in Renminbi perhaps, or other commodities like copper, iron, oil, etc., acquire other mining operators, and many other alternatives. The move away from the Dollar has increased since 2009.
Can someone please explain Mish’s point. The black and white graph shows China UST at around 1200 billion USD since 2011, but we have had a trade deficit of around 300 billion USD each of those years. According to the logic presented by Mish, China should hold something closer 3600 billion UST currently, what am I missing?
Stan88 is right that the way they would shrink their balance sheet is to let the assets mature and not reinvest, but there would still be the question of what they would do with the principle.
I agree MS, however they are accepting UST as payment in the BIS trade deficit transaction, so what are they going to do, demand dollars? that would deflate the value of the bonds they already have in a hurry. I do not confuse China’s capital flight with government actions, THEY ARE THE SAME THING, (and such is the truth on everything North Korea says and does has the tactic approval of Bejing) I have read the boilerplate, their manifesto, they have a representative government after all.
China doesn’t need to buy treasuries with their excess dollars anymore than I do with my “excess” dollars. Yes, the dollars need to go somewhere but there are a million options. – NOPE – There are not a million options – Do not confuse Chinese capital flight out into US properties with government actions. Yes the could buy real estate – in theory – but they need liquid assets to stop capital flight – Treasuries – I suppose gold
Warren Buffett buys the stock of a company, then tells the world. Stock price rises.
China doesn’t need to buy treasuries with their excess dollars anymore than I do with my “excess” dollars. Yes, the dollars need to go somewhere but there are a million options.
And to Carl_R, sure China does not need to hold US treasuries (“UST”). In fact, China does not need to hold UST (nor USD denominated assets) at all. China could sell every UST it owns and buy every overpriced house and commercial property in London, Sydney and Vancouver. But whoever bought all those UST from China now owns UST. Someone must own every financial security issued until it is retired. And the only place US dollars can go to retire is the US Treasury, for the purchase of UST.
Yup. Remember, the deficit spending comes first, then the Treasury issues treasury bills and bonds to hoover up the dollars that the federal government has already spent into existence. The Treasury auctions only occur because they must do by statute, and because they need a mechanism to hoover-up all those dollars spent into existence. The federal government does not need to borrow money in order to spend it. That is a myth.
This situation is actually very analogous to when the Indians sold Manhattan Island for blankets, beads and trinkets. We are selling the US for cell phones and trinkets. Five years from now those will all be in the landfill, but the land they bought with the profits they will be theirs forever.
China has to hold something denominated in USD. It could be treasuries, but doesn’t have to. Real estate is another alternative. They can continue to buy houses and commercial properties, for example, and then rent them back to us.
meh… made sense for them to throw a hissy fit about ten years ago. Today, less so.
If China were really planning on selling a substantial amount of treasuries, they most certainly would not be jawboning the price lower before they started selling them.
China is forced to keep buying them, but not necessarily at today’s prices. This kind of saber rattling could, at least theoretically, be a way to instill enough caution in other market participants, to nudge the price lower. Sooner or later, China’s growing geopolitical ambitions, are going to drive them to look for ways to make it more expensive for the US to maintain and deploy its military around the world.
This is an astute piece by Mish. I think that China may be just rattling their saber a little in an attempt to head off increased US pressure regarding trade and North Korea. If they can make the Trump administration a little more wary about the potential end of cheap financing for our federal debt at a time much is riding on the deficit-financed tax cut, they probably figure that their timing is pretty good. I suppose they can buy USD-denominated corporate bonds or even stocks in lieu of US Treasuries (look at Swiss National Bank, for example), but my guess is that the Chinese government runs the risk of being regarded as imprudent if such corporate bonds or stocks materially displace their US Treasury holdings.
They don’t have to sell the treasuries – just let them mature and cash them in.
Anyhow, Mish, you are 110% correct on the Chinese (and Japanese) holding US Treasuries due to the trade deficit. According to the President in his joint news conference today with the PM of Norway, we are in a trade surplus so I suppose the Treasury department, or the FED, is holding Norwegian Krone.
Don’t know what happened to the message I was working on, but I do have a new computer with a slightly different keyboard, so my apologies for an incomplete message if it went through.