This will be a short post. I am not worried about China selling its US Treasury bonds for several reasons:
- As they sell, the Yuan will rise versus the Dollar, which the Chinese Government does not want. Eventually their exports will fall, as US exports rise.
- After that, the Chinese Government faces a reinvestment problem. What do they reinvest in? The Euro is under threat, the Yen doesn’t want more investors, and the rest of the developed world’s currencies are in the stratosphere.
I think the threat of the Chinese Government to sell US Treasuries is empty. They can’t do it without hurting themselves significantly.
- Buy storable commodities, gold? Done that. Hoard more? At these prices?
- Switch to other types of debt than government debt? After the brouhaha with Agency debt, I suspect they would be less than willing to wander off the beaten path. Besides, they are pretty big, and they are dealing with thinner asset classes. If they have driven up the prices of Treasuries, imagine what they could do to corporates?
- Start buying companies around the globe? If governments would let them, maybe, but there would be a political stink.
- For a weird idea, China could buy surplus US housing and restore liquidity and collateral levels to a market in oversupply. After a decade they get out at a profit, probably.
Also, the lower level of liquidity could be an issue if actions need to be taken to recapitalize their banks when the next crop of bad loans has to be reconciled in the next few years.
China’s options for holding the proceeds from its trade surplus are limited. For all of their deficiencies, US Treasuries are a liquid and deep market. Chinese exporters benefit from keeping the Yuan weak versus the US Dollar. I don’t see things changing soon, absent a bolt from the blue.