China’s Treasury Holdings Make U.S. Woes Its Own

[alp227]

Source: The New York Times

SHANGHAI — However grim Washington’s debt and deficit negotiations may seem to Americans, the impasse is nearly as disturbing for China.

As the United States’ biggest foreign creditor — holding an estimated $1.5 trillion in American government debt — China has been a vocal critic of what it considers Washington’s politicized profligacy.

“We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong Lei, a foreign ministry spokesman, said at a news conference late last week.

Beijing might prefer to respond by starting to dump some of its American debt. But in this financial version of the cold war, analysts say, both sides fear mutually assured destruction.

Read more: http://www.nytimes.com/2011/07/19/business/china-largest-holder-of-us-debt-remains-tied-to-treasuries.html?pagewanted=all

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[banned from Kos]

1. Ha! China is stuck since they peg. They have to own US Treasuries

in order to keep the Yuan stable. And China has 9% inflation - they have to buy more as their inflation rises.

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2. Actaully this is completely false -

If China was to unpeg then inflation would plummet - you have it backwards.

The YUAN would massively appreciate (which is what the US wants). This would cause their exports, American imports, to be much more expensive.

The Chinese are going to do this no matter what - it is a matter of time. Appreciating the YUAN is like the death blow for the US.

It means that all American consumer products (these are made in China) will suddenly be worth ten times as much (consider an ipod costing $5000.00 instead of $500). This will cripple American companies, cripple American society totally.

Meanwhile with the hugely increased value of the YUAN chinese will experience huge spending power increases, fixing their property bubble and catapulting their middle class into being three times the size of the American middle class.

This subsequent spending power will mean that china is no longer an exporter, but rather a self enclosed ecosystem - it is a demand led consumer society rather than an expert led one. This transition is almost complete.

The final nail in the coffin will be the Chinese purchasing power globally, it will also drive up prices of resources, feul, food etc. so not only will massive deflation of the US currency through collapse in demand for treasuries (or flood of sales), but the relative purchasing power will also collapse. The flow through on fuel will simply make the US a third world country. Even massive companies will be worthless as their value is wiped.

The only possible response form the rest of the world will be to immediately shift to a pool of currencies (a basket) as a new reserve, this has already been in progress for some time - and is also part of the war against the EURO, and the African Dollar which may have sparked the recent unrest in Libya.

The basket of currencies is already in progress with many nations already conducting oil transactions out side of US dollars.


If America as a reserve currency was to be replaced, along with the ridiculous quantities of treasuries issued, and a subsequent default, then the interest rates in the US would also have no choice but to move to a more realistic rate in order to attract any attention - which would also of course destroy the US through the magnitude of scale of the debt through higher interest rates.



China does not give a flying crap about its treasuries when it knows that it can simply drop $1.5 trillion and destroy America forever, along with most of its rivals, and place it as the worlds preeminent super power over night.


War is no longer fought with guns between wealthy nations - this is the first thing you learn in International Relations - war is fought on the economic front. Right now the US made a bet it could beat China by saddling it with debt - China called their bluff, took on the debt and will now simply appreciate the YUAN and force the US into insolvency.

Americas only response will be the same response it always has in a time of crisis - a Demonstration of America Will and Resolve - the most terrifying thought.

Baers forecast of an Israeli strike on Iran now looks more, and more likely with every passing day - it is the only possible solution to Americas problems as it means China will be totally cut off from energy supplies and civil unrest, combined with economic destabilization through energy interruptions (manufacturing, construction, steel, food, transport etc) will cause them to break down. It is America's ONLY OPTION. It makes a great deal of sense now why Saudis bought those two hundred tanks - far to many for civil unrest and clearly something to do with Iran.

[NewJeffCT]

3. The yuan has been appreciating against the dollar for several years now

In 2006, it was over 8 RMB/dollar. And, it was around 8/dollar for years.

It's currently under 6.5 RMB/dollar.

The yuan has also not been pegged to the dollar for years now, either. It's been pegged to a basket of currencies since 2005, which is why the value has been appreciating over time.

If the yuan was on the open market like most other currencies, it would not suddenly go from 6.5 RMB/dollar to 0.65 RMB/dollar. It would continue to appreciate, but at a more rapid pace before it settles somewhere around 5 RMB/dollar, which is where most experts think it should be.

And, a $1.5 trillion drop in China's economy has far more devastating effect to China's economy ($5.8 trillion GDP) than it would to the US's $14.6 trillion economy. It's bad for everybody, but worse for China.

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4. read my post above - your wrong

the default would do nothing to harm China. It would destroy the US.

[NewJeffCT]

5. ummm

China converted their currency to a basket of currencies in 2005:
http://business.timesonline.co.uk/tol/business/markets/china/article553772.ece

Historical price of the RMB, from the flat level over just over 8/dollar prior to the basket announcement to it's current level:
http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1311069739352&chddm=2546564&q=CURRENCY:USDCNY&ntsp=0

Size of Chinese economy and US economy:
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

So, China's warning the US to not default is just for its concern about America, and not any concern about their holdings?

And, China is not the only option for low-cost manufacturing, either. There is India, Vietnam, Brazil, Mexico, Eastern Europe, etc. Not to mention moving manufacturing back to the US.