Please Sell Your Treasury Bonds, China

This will be a short post.  I am not worried about China selling its US Treasury bonds for several reasons:

  1. 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.
  2. 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.

Options:

  • 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.

3 Comments

  • jdmckay says:

    David:

    As usual, my disclaimer when commenting here: I’m sure you think I’m a pain in the butt, but *I’m* also sure I’m trying to get your to expand your understanding of these things you write about, as your biases do distort your perceptions of reality of these matters, just as I’ve said previously.

    Quick sumnation of our conversations wrt China: you say… hey, they can’t be trusted, you won’t invest there, they rip off others technology, they’re closed society… etc. etc. I say they are eating our lunch, they’re growing their own markets w/homegrown tech/research/education… etc. etc.

    So then, to your post here. I think you miss the point… meaning, that in my view China very well may not dump it’s Treasuries. However, what determines that, for them, is not the criteria you set forth.

    Rather, I’m damn sure the criteria is whether collective US populous… political, news, and especially what has now become a culturally ingrained mindset that, in the absence of an economy which considers what’s needed in the world as it changes so quickly, and then… from that, does things to plan and meet those needs, we instead… well, convince ourselves that yesterday’s (decades ago) successes justify/guarantee today/tomorrow’s rich future while, in reality, we’re going in reverse.

    I’ve given many examples before, trying to make this point. But at this interval, we have another so I thought I’d point it out.

    With the foolish political bickering wrt the Solyndra bankruptcy, what seems lost in the discussion on our shores is what that was all about, and how it is relevant to US (and world) economy… particularly absent the stuff I say is absent.

    Bloomberg today:
    Obama $8 Billion Solar ‘Betamax’ Undercut as China Backs Rival Technology

    The money quote:

    The cost of generating power with panels plunged about 37 percent in the past year as Chinese factories cut prices, pushing three U.S. makers including Solyndra LLC into bankruptcy protection in the past quarter. Germany’s Solar Millennium AG (S2M) walked away from a $2.1 billion U.S. loan guarantee last month and ditched thermal devices for a cheaper photovoltaic system.

    If one has been following the breakthroughts in solar tech, it has been clear for a while that Photovoltaic is where things are going, for the precise reasons stated in that quote.

    The Chinese have pioneered this stuff. They are leading with statements reflecting *their* investment in this stuff, while we’re bickering here of the Solyndra thing… all the while missing how static and unworkable the environment here is towards moving forward with this stuff, not to mention what that means for future energy cost/production/fuel source limitations etc.

    I say to you… Chinese leadership is waaaay ahead of US wrt to directing resources to what’s needed. They have vastly improved their models for doing things beyond the *beliefs* ingrained culturally here (eg: defining corrupt capitalism as “free markets” etc.)… they are moving things forward in China.

    China is more committed to a successful US economy then we are. What will determine what happens wrt to their US Treasury holdings has much more to do with US “getting with the program” then it does circumstances you de4scribe. If we continue on path we’re on, we’re going to be dumber in 10 years, more buried in clutter of mis-applied resources (all of ‘em… human, physical, land/housing etc.)…

    It’s up to us, not them. We are stuck in reverse. Manifest stupid parading as virtue… absurd.

    Ok, have a nice day.

  • Dave_G says:

    The best thing the U.S. could do is discourage / block China from buying/holding U.S. debt (aka Treasuries). This would make it exponentially more difficult to peg the RMB to the Dollar, forcing them to allow it to rise or risk massive domestic inflation from lack of tools to sterilize currency holdings generated from exports.

    This would level the (currently highly tilted) playing field, promote more balanced domestic economies here and abroad, and lead to increasing middle-income industrial employment.

    It’s a win-win. And politically sellable. When will the USA wake up and realize our jobs are being stolen by mercantilist policies of not necessarily friendly foreign countries?? THAT is the trillion-dollar question.

  • sg says:

    “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.”

    Probably not. Homebuyers who actually have money in a decade will want new houses, not old ones. There will not be buyers for them to make a profit. The only growing demographic groups in the US are the poorest and the lowest scoring on academic achievement tests signaling less productive workers in the future.

2 Trackbacks