China and US Treasuries, Should We Worry?
China is reported to be worried about US Treasuries and the potential devaluation of the USD. Now plenty of conspiracy theorists will pounce on this and say how big Chinese influence is etc etc.
So the question then becomes, should we as the US worry about China’s recent statement regarding US Treasuries? Being such a huge holder of our Country’s debt my initial answer was yes.
However, after emailing a good friend of mine I found out China’s warning is more nominal than real. Here’s the reasons why (note below is copied pasted from the email):
1) China holds $1 trillion in treasuries. The classic saying goes that if owe the bank $1000 it’s your problem, but if you owe the bank $1 million it’s the bank’s problem. China holds too many Treasuries to be able to easily sell them. If the Chinese sell $10 billion and the news hits the market, Treasuries will sell off and further devalue Chinese assets.
2) China is more interested in keeping its economy steady than in the value of the $2 trillion forex reserve. Causing unnecessary financial turbulence would harm its prospects, which is mostly an export-based economy. Therefore it is in the Chinese interests to ensure financial stability, even if it means holding Treasury paper that keeps losing value.
3) Might makes right. The US is still the world’s most powerful military and economic power and China is unable to call the debts on Uncle Sam even if it wished. Since the consequences of attempting to do so would be unpredictably catastrophic, it is unlikely to do so. The current Sino-American relationship is quite symbiotic and will remain so for the forseeable future.
So why is China firing an empty bullet?
Certain experts within China believe the USD and Treasuries will lose value and do not support buying more Treasuries with reserve money. We believe that, and this is pure speculation, that the warning would serve to soothe the worries of the don’t-buy-treasuries group somewhat. It appears however, the Obama team will continue to spend as it pleases as long as the bill passes Congress.
Update: Seems this analysis is spot on, check out this bloomberg article.
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