Decoupling Risk Looms
Please consider China May Ditch US Treasuries as Decoupling Risk Looms.
China could gradually cut its holdings of US Treasury securities by about 20 per cent to US$800 billion, the state-backed Global Times reported on Friday, as Beijing continues to weigh options to insulate itself from tensions with Washington.
China’s Development Research Centre, a think-tank under the State Council, said this week it was possible Washington might seize China’s holdings of US government securities if the bilateral relationship devolves into a full-on confrontation.
Xi Junyang, a professor at the Shanghai University of Finance and Economics, was quoted as saying by the Global Times that China will “gradually decrease its holdings of US debt to about US$800 billion under normal circumstances. But of course, China might sell all of its US bonds in an extreme case, like a military conflict,” he said.
Jing Sima, China strategist at BCA Research, a consultancy in global investment research and strategy, said that Beijing could look to Russia for steps in managing exposure to the US dollar amid threats Chinese banks could be cut off from the dollar payment system.
Who Wins?
I do not always agree with Michael Pettis on trade matters but I do at least 85% of the time as I do now.
This topic comes up repeatedly.
Michael Pettis Twitter Thread – 6 Key Ideas
- Here we go again. I am not sure how credible a source Global Times is, but for Beijing selling US Treasuries isn’t the hard part. The hard part is what the PBoC does with the proceeds. If they buy other USD assets, then nothing has changed.
- If they buy euro, yen, sterling, etc., they will unleash anger from these countries who will suffer disinflationary pressures as their currencies rise against the dollar, and who will have to absorb the consequent reduction in the US current account deficit.
- If they buy the currencies of developing countries, they take highly pro-cyclical credit risks that they have been actively trying to reduce.
- If they stockpile commodities, given how important Chinese growth is for commodity prices, they lock in a huge amount of volatility and more unwanted pro-cyclicality into their balance sheets.
- If they remain in RMB, of course, their currency will rise in value and their trade surpluses will disappear.
- Over the short term Beijing is probably better off by reducing the threat of Washington’s cutting it off from the USD system, but economically, and geopolitically over the longer term, the US benefits more than anyone else from a gradual Chinese reduction of USD holdings, which is why Washington should be pushing for this, not Beijing.
I took a 5-Point Thread by Pettis and broke it up into 6 key ideas.
Credibility – Here We Go Again
How credible is the Global Times? I do not know either. But that is not a precise enough question.
Here is a better question: How credible is the author of this story?
My conclusion is not very.
Russia colluding with China to form some currency alliance is not very believable outside of some trivial amount made for political purposes.
These stories surface at least 2-3 times a year and always with the same idle threats that never happen.
Understanding the Key Issues
Pettis hits the nail on the head with points 1, 4, and 5.
- If China dumps treasuries for the RMB (Yuan), the Yuan strengthens and Trump cheers.
- If China dumps treasuries for other US assets, nothing happens at all.
- If China dumps treasuries for commodities it pushes up prices even though it is a huge importer.
Pettis point #3 is not going to happen because tiny countries do not have enough bonds for China to buy and it would severely distort the market if China tried, so it won’t.
Pettis point #2 is more subtle but also note that there is no Euro global bond for China to even buy. There are only sovereign bonds of Germany, Italy, France, etc., with German 10-year bonds at a negative yield of 50 basis points and the 2-year bond sporting a negative yield of 70 basis points.
Never a Complete Explanation
Every time these dump treasury stories appear they never say what China will do with the proceeds of the sale.
The authors either have no answer or even more likely don’t understand the issues at all.
Either way, it’s a credibility issue.
Who Wins?
No matter how one twists or turns, the US wins if China dumps US treasuries.
China occasionally manages US treasuries in a fashion that people often claim as “dumping”.
However, the typical reason is China needs to support the Yuan (sell dollar and stabilize or increase the price of the Yuan) to stop capital flight.
As explained by point 5, that too helps the US even though it is a necessity for China as well.
What Would It Take to Dethrone the Dollar?
These dumping stories are often related to unfounded threats of China preparing for the yuan becoming the next global reserve currency.
Forget about that notion as well.
For discussion, please see What Would It Take to Dethrone the Dollar?
Mish
There is one result not mentioned when China dumps their USD holdings. All that the author mentioned is as expected but one thing I think is overlooked is the affect on USD economy. The credit (China’s cheap goods for T Bills) will no more be available as a result of decoupling. With next to zero savings and a population that consumes more than they produce there will be a big drop in the standard of living of Americans. In short US will be affected as much as the rest of the world.
which country will come out on top boils down to the pain thresh hold of the citizens of each country
When China dumps their Treasury holdings?
How are they going to do this? Into what investment class will they rotate? Did you read Mish’s article?
One thing that is not being said here is that the Chinese are essentially forced to hold Treasuries. Normally a country would spend that money on imports, and the Chinese do–take a look at the bull market in commodities, or say silicon chips–but its not enough. The US Government doesn’t let them spend billions on buying Google or half of Manhattan, so they turn to the one market big enough to satiate their demand… government bonds.
They don’t do this because they want to, they do it because they have to. The alternatives would be catastrophic.
Going by how America is bullying all the countries in the world, it is advisable that China dump all its holding of American bonds, bills and notes in order to save itself from the risk of America defaulting on its debt obligations. It should not suffer all the doom and gloom financial experts and analysts like to put forth, because after all America is not only the country in the world with which it can do business only. Given the present threat and rhetorics from America, it is wise on part of China to de-couple altogether from America and think of doing business with other countries despite suffering economic losses. After all, it is better to suffer some economic losses than suffering continued harresment from an administration led by an unprincipled and valueless US President.
Dear God, please read the article. They cannot dump their holdings without doing great injury to themselves.
When people point to China’s large holdings of U.S. Treasuries as proof of China’s solvency they frequently discount the amount of debt that has grown in the Chinese system. Even though China owns these U.S. Treasuries, China is running a massive U.S. dollar shortage both on a corporate and a national level.
Much of the problem stems from Chinese companies having roughly $2 trillion U.S. dollar-denominated debt owed to international investors. The rubber will meet the road as more countries that export to China question the value of the Chinese currency and demand payment in dollars and refuse the yuan. China’s currency is pure junk.
We are seeing rising interest in both precious metals and cryptocurrencies. Several factors are driving this trend. One is the idea governments have targeted cash and wish to move us towards a “cashless” society where they control our every move. Another is rooted in the idea inflation is about to raise its ugly head as currencies are debased.
Most likely the dollar will be around for a while yet and could be about to strengthen. More on the state of currencies in the article below.
What is the yuan convertible to?
Dollars (and euros and shekels and rials and rubles).
Not gold.
China, like all IMF member countries, CANNOT use gold as money.
The yuan is not backed by gold.
So,
The yuan is just another name for the dollar, just like the euro.
There is a lot of talk about whether or not the Chinese Yuan will ‘take over’ the USD for international trade. That thinking is skewed and actually not relevant because today there is nothing preventing international trade from being conducted in various currencies and even baskets of currencies.
There is no need to have one single dominant currency. China most likely does not want to take over the role of the US because it becomes a trap. The USD is a captive of global trade.
From
http://www.zerohedge.com
There is a minor gap in the proposal that the Chinese would sell the bonds and take the proceeds in RMB. Do foreigners own 800 billion dollars of RMB that the Chinese can buy with their Treasury sales? I have no idea, but expect that you do. This is a slight variation on why the RMB cannot become a reserve currency…foreigners don’t have many of them, do they?
I hope you are enjoying Utah.
Don’t these Chinese geniuses know that the Fed has a printing press and now have absolutely no reservations whatsoever about using it?
The Gold-backed yuan is silliness.
The problem the Chinese fear, and also any other country that doesn’t kowtow to the USA, isnt that the can’t buy, say oil, with another currency other than US dollars. It is that that they can’t settle transactions because they’re frozen out of the SWIFT Payment system by the USA for whatever reason. The perception is that if the US dollar wasn’t the reserve currency it would be harder for the US government to control & enforce this. There’s no point having & earning vast quantities of US dollars if you effectively need the permission of the US government to spend them. This is what has dawned on the Chinese & all as they watch the way the US enforces sanctions with countries with which it has disputes
Therefore the Chinese and others, would like access to a currency, or digital currency, that can’t be blocked in the banking system. Hence their research into such as well as Europe’s research into a European payment system. In the light of this it’s not surprising the Chinese would want to reduce their USD reserve holdings and I would expect this trend to continue, particularly whilst their relations with the US are on such a weak footing..
Six000 you totally and completely missed the point of the article.
China has NO WEAPON in treasuries to use against the US
“These stories surface at least 2-3 times a year and always with the same idle threats that never happen.”
…
Liquidity.
China knows – as do other very large sovereign / institutional funds – the depth of the Treasury market (largest on the planet) is its greatest ASSET. Where else can you put / remove tens (hundreds) of $billions at a moments notice with barely a ripple?
China has no choice but to remain in Treasury market.
Anglo super elite have very very poor thinking abilities. They set up China as the world factory, and put all the eggs in one basket, all in the name of globalisation scam.
Instead if they got the brains, America could have a diverse source of supply chain from South East Asia, South Korea, Taiwan, India, Mexico, South America and Africa, etc.
These supply chain countries will own US treasury bonds in a well distributed balanced global finance.
By putting all eggs in one basket which is China, the greedy no brain Anglo super elite are just asking to be SHOT AND KILLED BY CHINA.
China is a creation of the globalist super elite bastards from London, that sold out America and exported US manufacturing to engorge some fat f(*)k billionaires from Wall Street.
Globalization scam has been sold by the last several Presidents, Congress, both Teams, and MSM.
It’s literally a scam to make a few people super wealthy. The West created today’s China by allowing corporates to outsource to China due to own greed, and not having the foresight to see the negative effects that would have.
Kissinger, Bush, Obama, Clinton, Biden etc.. have all made deals with China to sell US down the road to globalization.
The Anglo super elite Predator Class transported US factories to China to make billions on wage arbitrage. The money is in the Cayman Islands and the factories are in China.
The West is now face a powerful and highly nationalistic adversary that does not share a commitment to the rule of law and human rights.
China can be weakened by severely reducing that outsourcing but it seems clear that it will react militarily.
If the West will initiate a permanent move against the CCP within the next two years (removing the vast majority of its investments and manufacturing reliance) the CCP will collapse.
If we do not do that, the West will collapse within 5 years. It’s our choice.
AMERICAN UNITED WORKER FRONT
From
http://www.zerohedge.com
If they buy other USD assets, nothing has changed.
<<<
Really?
Suppose the sales are just for Dollar cash balances.
Agree that nothing happens for FX or trade movements, but the scale of the sales could depress the UST market…and the US needs the UST market to fund the deficit.
“but the scale of the sales could depress the UST market.”
…
A couple hundred billion? Not for long, if at all.
China doesn’t have to measure its investment success in terms of financial profits or losses. The US bonds in its portfolio can be used as a weapon against the US. China’s bond selling would cause higher interest rates, absorb liquidity, and slow US economic growth. If the FED printed to absorb the bond sales, then the action would be a self inflicted wound to the US dollar. What China really wants is global power from its investments. If it wanted products at low prices, it could beat it out of its citizens.
“China’s bond selling would cause higher interest rates,”
…
Even if their selling caused rates to rise, the ensuing slowing of economic activity would send rates back down … as always.
There are more aspects to this. As Keynes said when you owe the bank $10,000 and can’t pay, you have a problem, when you owe the bank $1 million and can’t play the bank has a problem. The weapon would maybe blow up in the face of the user.
Driving $ interest rates up will bring them a huge capital loss on their bond portfolio; and their own currency would suffer from the decline in the value of their foreign exchange reserves? If the Fed printed dollars what exactly would they do with them? into whose hands would the dollars go? They would have to sell them to others and to make their value fall, They might simply swap treasuries with some interest for deposits with none. Let’s say it worked that the dollar did go down, is it great for China if their currency is expensive. What happens to employment there? and the value of their reserve position goes further down, How many Chinese businesspeople and leaders have huge offshore assets denominated in $s? They want these personal assets devalued?
So even if you succeed to give the US economy a huge problem and restrain its growth that comes back like a boomerang in Chines unemployment. So you engineer the loss of your biggest customer? Making your own stock market tank? and the corresponding benefit is ??? It is hard to see enhanced power for China from destroying the value of its international reserves, driving up its exchange rate and rendering its largest customer into a net exporter.
Your arguments make perfect sense based on the assumption that the goal of China was to make money from purchasing US bonds. My argument is based on the assumption that China values world domination more than money or material wealth. China has a virtual monopoly on global manufacturing, and a decided military advantage over S. Korea, Japan, and Taiwan; Pacific Rim neighbors the West now uses to diversify the supply chain. As far as wealthy Chinese citizens with assets in the West, they are expendable to Communist Party. Those citizens did their job recruiting Western companies to have China manufacture things. Chinese factory did their job working at below market wages and hazardous conditions. China is now at the point where it can REALLY flex its political / philosophical will by hitting the West in the wallet.
If China sells Treasuries the dollar goes down but also treasury yields rise something Trump does not want. Russia is a 3rd world economic power They don’t have China’s clout when it comes to leverage.
Seems Trump has a new favorite weapon in his arsenal against China. Instead of tariffs he bans them or blocks companies from selling technology. It’s an evolution of his carousel tariffs. Now he keeps China guessing as to which company he’s going to ban from the U.S. It’s very disruptive. I would not underestimate China’s anger at this tactic.
Let’s discuss dumplings instead of dumping.
Who doesn’t love Chinese dumplings?
i prefer German and Czech dumplings
Trumplings?
Theoretically the run up in the stock market makes sense if China has been liquidating dollars. But once the market figures this out it will tank. All the unpredictability by Trump has led to opportunities for China, Russia and Iran around the world. I smell a huge decline in markets come election day. China holds the trump card in this house of cards.
Fox news reporter Jennifer Grifffin confirms the Altantic story on Trump and his comments on soldiers dying being losers. It’s another bad day for Trump. Multiple boats in Trump boat parade in Lake Travis in Austin have to make distress calls ans multiple rescues have to be made. It isnt going to go well for Trump now that the calendar has turned to september. His only choice will be to try to steal the election and also get Russia to interfere again.
Define “confirm”. Was she there? Does she have sources?
Otherwise she is just repeating …
She talked to multiple people who were with Trump when he said it. Lol. You think this charlatan arsonist of a president has credibility.
Trump says enough stupid things that can be verified, why is this based solely on anonymous sources. Glenn Greenwald is hardly a right-winger and he does a good job addressing the “confirmation” problem with this story.
I like Glen Greenwald but in this case he is incorrect. I do believe he is right on the following:
China, Russia, Ukraine, N. Korea, and others may interfere in the election. In favor of whom, though?
Russia already has. Ukraine is just a red herring that is used by Putin. North Korea cant do anything without China’s permission. China holds the trump card because they can crash the dollar quickly. Russia just wants chaos.
Anyone who thinks that all foreign intervention will be on behalf of Trump is deluded. Do you think Trump is about as unpopular a leader around the world as the US has ever had. I would expect more intervention on behalf of Biden than on behalf of Trump.
China could crash the dollar, but only at the cost of crashing their own economy. What would happen is that they would restore the world economy to the historical norm.
It is rumored that China possesses a huge amount of tonnes of Gold and is still purchasing.
It is also rumored that China is working on a cryptocurrency backed partially with Gold.
With the potential for China to unload 20% of US Tres,…let’s just say they are most definitely playing on a multi-level chess board.
True, but the reality is they are stuck with us as the big buyer and their standard of living is tied to selling huge amounts to the US. It is extend and pretend on the bilateral scale.
This kind of cogent analysis is why I’ve read Mish for more than 10 years.
(OT) Whatever floats your boat, was apparently in short supply:
Boats participating in a Trump support parade sink in Texas, officials say
We have a picture for the ages right here:
I don’t quite understand what these idgits got up to, but that picture tells me the laws of physics were about to impart a lesson to the SS trump.
The speeds the boats were operated during the “parade” threw tremendous wakes that added together. Those were small scale “rogue waves”. These waves (and subsequent capsizes) could have happened during any boat parade, regardless of political affiliation.
This happens at boat parades regularly? Clearly, idjits are involved here.
The selling of US Treasuries is to purchase massive amounts of weapons.
Xi Jinping tells the PLA to, “Prepare for War”:
Guns pay for peoples butter….a full employment project.
Heightens patriotism in a trying time.
It looks like China is buckling in for impending food shortages.
Why can’t they just buy gold and silver?
I have a stupid question….
Why does China or any other country feel the need to buy US Treasury Bonds (or bonds of any other reliable country for that matter)??
To finance trade deficit and steal profits. If you people are making profits and stealing other country’s profits they think their system works, make money, and support their gov’t. If you let another country steal your profits, you people will eventually riot, loot, and demand a gov’t overthrow. See the big picture now?
What else do they do?
Hold paper dollars at a bank that goes bankrupt with a $250,000 FDIC limit when they can be making at least a minimum amount of interest except for Europe and Japan.
There is no other answer.
Pettis and I discussed all the options, each with their own drawbacks.
Mish, I don’t think that was flubber’s question.
China has to buy US treasury bonds, because otherwise Yuan would appreciate against USD and china would not be able to import that many “Made in China” goods to the US profitably. Some companies in China could go belly up the moment China stops buying US assets.
To simplify even further, China runs a trade surplus with the US. As a result, they acquire more and more US Dollars. That brings them to the question, what am I going to so with all these dollars? Now you are getting the answers Wagner and Mish have proposed:
Could the Chinese government or central bank set up a sovereign wealth fund like Norway or Saudia Arabia and diversify from US treasuries into worldwide stocks/real estate/gold? Can the US or other western governments block the ownership stocks by a Chinese government wealth fund?
Could they not repay some of their debt? Or perhaps buy Gold?
“5. If they remain in RMB, of course, their currency will rise in value and their trade surpluses will disappear.”
If I remember and in lay terms, China takes dollar earnings off Chinese companies and exchanges them for Yuan at set rate, which it then holds, spends, or invests. It controls the exchange rate this way, the dollar holdings possibly acting as buffer.
If China did not keep dollars (or US debt as proxy) those dollars would be spent by China on the world market to buy “whatever”. They would likely make their way back to the US, just as with the purchase of treasuries, so I see no reason apart from that of trust/sentiment for the dollar to lose value this way. The Yuan would not nescessarily become stronger, because it would then not have that dollar backing. Even if it did strengthen, there are ways to lower its value (ditto europeans if China bought into its currency) which are very well known and practiced by most countries.
As Mark52 points out there is a certainty for US finance by the existing arrangement, but technically the US could just put all the rejected treasuries onto the fed balance sheet and continue spending, and buying from China, if it so wished. So the existing arrangement is most likely a compromise, the interest on the investment in treasuries being paid for by …. ?
Basically china has dollars. They could repatriate them or buy u.s. assets but the U.S. says hold on don’t do that we’ll let pay you interest. If China were to flex its muscle and start buying up land and corporate assets instead of holding u.s. treasuries there would be screaming in the capital that china is buying America. Repatriating is very disruptive too it impacts currency exchange rates and interest rates.
If China would “flex muscles” and start to buy US real estate instead of US bonds to maintain trade surplus, then US would still have upper hand because US could easily impose real estate taxes to make that investment overall less attractive (just like it has already happened with US bonds that yield paltry interest).
China is actually subsidizing our consumption to keep its factories at work in a loop that works until it stops. China has no alternative but to recycle it’s trade surplus and finance our trade deficit. They need to keep selling to us and therefore they will continue to build dollar reserves. The cost of not selling to the US would be high unemployment in China. It is not practical to think that many dollars can go to other buyers. What, for example, does Germany want with more dollars? So China can either hold US treasuries, buy American products or use the dollars to buy real goods (commodities). For all the reasons mentioned above the commodity purchases are not wise. Buying American products will import unemployment as opposed to exporting it. That is not going to happen. Buying assets in America is risky if done by foreigners at scale. Those assets could be expropriated or heavily taxed. Not fair, but. In the end we may see our currency devalue because we have bankrupted ourselves and then those cumulative Chinese surpluses will be paid for at a fraction of their original cost in real terms. Or they will bankrupt themselves by investing in receivables that will never be paid (i.e. our trade deficits) as well as their own pretend bank loans.
You are very very wrong. China never subsidise the American consumption at all.
America should just cut off US dollar supply to China, and China economy will collapse immediately.
Without billions of US dollars trade surplus, China cannot print trilions of Yuan yearly to subsidise all the R&D to make better high technology to compete against America high technology corporations.
Also China printing trillions of Yuan every year to build the biggest infrastructure in the world. ALL PAID BY AMERICAN CONSUMERS.
American consumers are stupidly helping China to buy the best technology and scientists from around the world, to destroy American empire. This OXYMORON behavior of American Congress is mind boggling.
America high technology should get the high technology supply chain from Taiwan and Thailand and all their problems solved. Taiwan should allow import of cheap labor from China and North Korea to reduce smartphone production cost.
America can survive without China trade. America partner and loyal allies such as Japan, South Korea, Taiwan, Thailand, Phillipines should be leveraged to contain China now.
But globalist elite from UK is helping China to be the next super power. Why ? You have to ask and hand it to Kissinger and Chatham House.
Anybody who know the secret discussion going on in Chatham House will have a clue what is going on in global geopolitics play.
From
http://www.zerohedge.com
“If China were to flex its muscle and start buying up land…”
I doubt our political class would care, as most are landowners and would love to see their “investment” go up even if it squeezed their fellow citizens out of the market. “Who cares about them!”
If China were to buy up lots of real estate, that would provide an incentive for the US to go to war with them and take their land.
Do you know why China able to print more than 3 trillion Yuan a year for the past 5 years, without much inflation ?
China has been printing more than 1 trillion Yuan every year since 2005, to stimulate the economy.
China able to print such huge trillions of Yuan yearly, with minimum inflation, is because China have US$300-400 billion trade surplus with USA every year.
In addition from 2000-2014, China have accumulated more than US$3.5 trillion in forex holdings overseas. This included US$1.3 trillion in US Treasury bonds making China the largest owner.
Therefore trillions Yuan China printed yearly are actually supported by China trillions in forex holdings and billions in yearly trade surplus.
This trillion Yuan printed every year, allow China to pay for all the expensive infrastructure, such as high speed railway network system, big dams, huge wind turbine farms, country wide telecom infrastructure, vast road network, south to north water transfer canal project,etc.
Also China was using the trillion Yuan printed to subsidise exporters such as Huawei, ZTE, etc.
China able to invest and build such giant infrastructure projects WITH NO NEED to depend on IMF, World Bank and foreigners investment.
So there are no secrets of China economic success. It is all due to trade surplus earned from USA, and printed trillions Yuan to invest in their huge infrastructure projects, and subsidise exporters, to ensure can continue to earn trade surplus with US.
Americans consumers are the real suckers all along. None of them benefit from trade with China.
From
http://www.zerohedge.com