Washington’s debt-default crisis gave China the perfect opportunity to taunt the U.S. government, and – with the editorial from Beijing suggesting the creation of a “de-Americanized” world – the Chinese sure took it.
Could China bring the United States to its knees without ever setting foot here, just by virtue of its ownership of more than $1.27 trillion in our debt?
No. It’s all smoke. Economically, the Chinese are too far in bed with America to get out anytime soon.
The South China Morning Post reported that Beijing continues to add to its U.S. Treasury stockpile. While U.S. data on Treasury purchases since last July isn’t available, China’s foreign exchange reserves increased by $163 billion in the third quarter, most of it from U.S. Treasury purchases.
No Options
But what are China’s options if it wants to sell some of its U.S. debt to diversify its holdings? The short answer: It doesn’t have many. Let’s look at some of them:
- Other currencies. No other country besides the United States has enough of its money in circulation to meet China’s needs. Further, no other currency is as safe as the U.S. dollar. For example, as the economic crisis of 2008-2009 deepened, countries flocked to the U.S. dollar (in the form of Treasurys) as the only safe-haven investment. The bottom line: Despite the rhetoric in Washington, there is no other country in the world with a currency as safe and as strong as the U.S. dollar.
- Private-sector bonds. Way too risky for China or any other country. The least risky at this point are those of U.S. companies. So it would really be buying American dollars anyway.
- Gold. The value of all the gold in the world at current prices ($1,280 an ounce) is $6.6 trillion. Roughly 75% of that is in the form of coins or jewelry, which is not available to governments. There’s not enough gold for China to buy.
China’s Hooked on Treasurys
In order to keep the value of the Chinese yuan from appreciating versus the dollar, China’s central bank must buy U.S. dollars in massive quantities. Rather than just sitting on the physical currency – which pays zero interest – it buys U.S. Treasurys.
Not only will China continue to buy our debt, it must continue to buy it. Its exchange rate policy dictates it. Selling Treasurys would reduce the value of the yuan, something China can’t afford.
In other words, we need China to buy our debt to finance our annual federal budget deficit. China needs to buy dollars to prop up its currency.
For better or worse, China and the United States have an incestuous financial relationship that welds the two countries together.
It’s in both countries’ best interest to see that things stay that way for a long time.
Good investing,
David Fessler
The writer ignores that China has stepped up its gold production and the government keeps all of the produced gold in the country. It has also reduced the rate of its purchase of US Treasuries. It is also slowly, in graded steps, allowing its currency to reflect its true value more accurately. And its politicians have been complaining about the dollar’s role as the reserve currency for a few years now. There shouldn’t be any question that over time China will try to end the dollar’s current role.
David, I understand your rationale but don’t understand one very important thing. Why couldn’t China change their currency policy such that their currency became the world currency? I realize that it would be a hit to their economy but if they were able to pull it off, would they not have felled their greatest enemy without firing a shot and then become heirs to the kind of monetary terms that allowed the U.S. to thrive for so many years? Thanks for your response.
Wonder what would happen if China’s currency went up b/c they dumped our treasuries. This is complicated ,but right now China has a lot of companies that are doing quite well. While the USA has quite a few that are not doing that well. Besides them stealing all our tech that companies paid dearly for ,or that we as a nation paid dearly for surely I don’t believe this rosy scenario Mr Fessler writes.
I cannot believe that you are so hooked into the American rhetoric that you are pushing this line of thinking. Are you not aware that both Chase and HSBC have advised their best business clients that the banks will no longer be processing wire transfers from the U.S. to outside of the country? In other words, Chase, which has the government as a major shareholder, is now starting the process of currency restrictions. HSBC has followed suit and it is only a matter of time until other banks do the same. This is exactly what happened in Argentina. The next move, if following Argentina’s path, is to seize all retirement accounts for their cash and offer to pay the account holders by way of printing money to give them their pensions. China is continuing to make reciprical currency agreements with other countries. It is also using the U.S.
T-bills as a currency in exchange for their acquisitions. And if they start dumping USDs, that would INCREASE the value of the Yuan verses the USD, not decrease it. Think about it. Whenever you dump ANYTHING on the free market, whether it’s gold (as when Russia dumped much of their reserves in order to pay their bills, and the price of gold dropped as a result to less than $300) or USDs, when China finally decides to dump their USD reserves, the American economy will drop to its knees. No, David, there is something else at play here, and it is something that the general public is not aware of. You might find it worthwhile to start checking the internet for instances where both the U.S. and Chinese navies were involved in a joint venture. I am referring to an instance that was written about by the respected Veterans’ Daily’s publisher. It involves a joint venture off of the coast of San Francisco in September of 2012. The only reason that China has not sunk the U.S. economy is that China and the rest of the world are dependent upon the U.S. military for our protection. And I am not talking about terrorists.
China will use their dollars to buy our real estate and companies, slowly…… but surely!
I may not have all aspects of the issue resolved, but it seems that if China buys gold with its current trade imbalance with us and with the current US debt that it holds (which it is doing), gets control of much/most of the tradable gold in the world, then holds it as US inflation increases (the President and Congress are helping China with this part), the price of gold could skyrocket. This scenario would be very good for China and not so good for us since our dollar would decrease in value and world importance. China cannot afford to quickly undermine the US dollar, but they sure seem to be positioning to do so in the future.
Where does China get all its money? Its residents are mostly poor, and make very little income from what weve been told. Yet they never seem to have a shortage of money. Do they tax their corporations heavily? Are they in debt like we are? Maybe we could learn something from them and how they handle money. Actually, we could probably learn from anyone. Were not very good at it ourselves.
Any idea if that is in long term Treasury’s (10yrs.)?
If so that speaks against the idea that with the counties increasing debt the big buyers will stay away from them unless the interest rises substantially.
there seems to be an error in the latter part – ” selling Treasuries would reduce the value of the yuan … ” Surely you mean the dollar,nt the yuan, as your thesis is the Chinese want to maintain, not appreciate, the value of the yuan against the dollar. Selling treausuies would keep the yuan high, wouldn’t it ?
How is it best for the Chinese on low incomes? Would they not prefer to see their purchasing power and quality of life increase? I do not understand the argument that there is not enough gold. The Chinese banks could issue notes that are backed by gold and maybe 10,000 notes would be equivalent to an ounce of gold. Why can’t you divide gold into liquid receipts? Would it not be better if all people used currency of the same value E.g. gold. Would it not encourage industry, productivity, efficiency, competition and cheaper prices? How does undervaluing currencies and overvaluing currencies improve the lot of the poor? Is this not the reason why countries with overvalued currencies have so much debt?
I misread your point on gold. Lately in Australia real estate prices have been going up. From people I have spoken to, the Chinese in their droves have been buying real estate in Australia. Maybe China will invest their reserves into commodities, businesses and real estate.
China is dumping US Dollars slowly by buying (one at a time) natural resource companies and natural resources deposits in other countries – Canada, Australia, Africa, Central America, SE Asia, and South America.
This is the (smart) slow drip method of draining the US Dollar swamp. This might take 3, 4, or 5 years, but the swamp will get drained.
Bond market will raise long term US bond rates to over 5% way before the swamp is fully drained. That’s when the party is over.
By 2020, the USA will be like one gigantic Detroit City. Canada will have to build a wall on it’s southern border like the wall along the southern US border.
Well, look what just happened! Guess you’re right about that too.