China Ready to Dump US Securities
This is serious. The Asia Times reports today that China is ready to start selling off its US Treasury Notes, ostensibly as a “punishment” for the recent US sales of arms to Taiwan. I and others previously warned about what would happen if China decided to let go of its dollar holdings – the gist is that China is the only thing standing between the US and catastrophic inflation. Previously these fears were pooh-poohed by establishment figures with the familiar arguments: “China needs us more than we need them”, “Who will China sell its surpluses to?” I even heard someone say, “Without us, the Chinese will be cavemen”. Well, it looks like China might have found itself a new trading partner, if this Asia Times article is any indication:
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.
Where do you think we’re getting the money to prosecute these $5,000 per second conflicts in the Middle East? Where did the money for our $2,500,000,000,000 (and counting) bank bailouts come from? China. They make our money real. Without their manufacturing powerhouse backing us up, our dollars are worthless. What, you think the world is going to value our “service economy” at $13,000,000,000,000 per annum if that money weren’t backed by Chinese promises? Not likely. And now those promises are now increasingly under threat.