Wikinvest Wire

China and all the U.S. debt they hold

Wednesday, February 10, 2010

Ambrose Evans-Pritchard at the Telegraph looks at one of the more interesting developments today in an increasingly shaky global monetary system in this report about how the Chinese government may be exiting U.S. corporate and municipal bond markets.

China orders retreat from risky assets
China has ordered managers of its vast currency reserves to withdraw from risky dollar assets and retreat to core debt guaranteed by the US government, a clear sign that Beijing is battening down the hatches for fresh trouble on global markets.

A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to US Treasuries or agency mortgage debt such as Freddie Mac that enjoys Washington's implicit backing.

BNP Paribas said the move has major implications for global risk assets. "The message from Beijing is that we don't like this environment," said Hans Redeker, the bank's currency chief.

"When the world's biggest investor turns risk-averse, that is something you take notice of. We think this could become the new theme for the markets in the medium-term," he said.
Recall that a couple years ago the Chinese quickly soured on agency debt from Fannie Mae and Freddie Mac back around the time that the two became wards of the state.

Unless they've taken a renewed interest in GSE-related debt (which, according to this report, it looks like they have), they'd be restricted to U.S. Treasuries only.
The directive covers both the State Administration of Foreign Exchange (SAFE) and China's state-controlled commercial banks. Together they have an estimated $3 trillion (£1.9 trillion) of foreign holdings.

The exact break-down of China's holdings are a state secret but it is understood that SAFE bought large amounts of corporate debt as well as municipal and state bonds during the boom years of 2006 and 2007. Any move to liquidate holding of California debt at this crucial juncture could have serious implications.
IMAGE The exact motives for China's shift of strategy are unclear. Analysts say the authorities may fear that the end of quantitative easing by the US Federal Reserve could cause risk spreads to widen sharply, triggering heavy losses. The shift in policy appears unrelated to the US spat with China over Taiwan.
In related news, Reuters reports that the PLA (Peoples Liberation Army) is urging that the sale of U.S. debt be considered in response to continued U.S. arms sales to Taiwan.

This was bound to come up eventually - after all, if you were a Chinese military leader, you'd probably look at all tools that were available to you in response to a military threat. To think that they would not is naive and now U.S. debt held by foreigners starts to take on some of the same characteristics of MAD (Mutually Assured Destruction) from the late 1900s.

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6 comments:

Anonymous said...

To think that they would not is naive and now U.S. debt held by foreigners starts to take on some of the same characteristics of MAD (Mutually Assured Destruction) from the late 1900s.
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The failure of Neo-liberalism. Open borders and markets may stave off a physical war but, currency wars, attacks on sovereign debts and equity markets may prove to be more harmful and surely easier, politically less costly to wage.

Anonymous said...

So, potentially being killed in an actual war is less harmful than suffering through an attack on your country's currency? I'm by no means a fan of neo-liberal international relations theory, but I think the fact that the Chinese military is suggesting economic measures (rather than, say, launching missles towards Taiwan) is arguably a triumph for neo-liberal IR theory. I don't think the theory suggests that nations will never be in conflict with each other, just that they will be more likely to resolve a conflict by means other than firing bits of metal at each other.

The Political Commentator said...

The United States is in the position where not only is there no leverage against China, but in a few keystrokes on a computer China could metaphorically bring the United States to its knees.

The full article is at http://www.examiner.com/examiner/x-25304-NY-Homeland-Security-Examiner~y2010m2d10-Terror-in-the-pits

Anonymous said...

Anonymous said...
So, potentially being killed in an actual war is less harmful than suffering through an attack on your country's currency?
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That depends. Are you 18 years old and thinking about joining the armed forces or are you older and wealthier owning a wide portfolio demoninated in US dollars and assets?

Anonymous said...

"That depends. Are you 18 years old and thinking about joining the armed forces or are you older and wealthier owning a wide portfolio demoninated in US dollars and assets?"
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No, it doesn't depend. Trading the lives of young men and women in order to preserve the net worth of senior citizens is flat-out wrong. If the old geezers want to fight for their portfolios, they can pick up a rifle, or learn to operate a drone.

That said, I'm sure there will be a war with China, the U.S. will kick their @$$es and blame the war on them. Part of China's price as the loser will be to forgive all U.S. debt.

Anonymous said...

That said, I'm sure there will be a war with China, the U.S. will kick their @$$es and blame the war on them. Part of China's price as the loser will be to forgive all U.S. debt.
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Keep dreaming Mate!
China has been around a lot longer than the US of A.
Its not going to be as easy as IRAQ was.

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