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Richmans' Trade and Taxes Blog
China's not selling. China's Buying
Recently, the Chinese government sold some of its U.S. Treasury Bonds, but the dollar-yuan peg hasn't budged. This means that the Chinese government is continuing to pour Chinese savings into U.S. financial assets at the rate of about $400 billion per year.
In order to understand Chinese policy, it is necessary to understand that the Chinese government buys U.S. bonds as part of its mercantilist strategy to keep the dollar high and the yuan low, so that Chinese industries steal market share from American industries and so that China gets America's manufacturing and research and development jobs.
The Chinese government knows that American assets are a lousy investment. It is obvious that the dollar will eventually fall by at least 25% vs. the Chinese yuan. Moreover, the People's Bank of China has had to actively suppress domestic consumption by raising bank reserve requirements in order to get the yuan needed to buy dollars without causing inflation.
A commentary by Brian Miller from today's Globe and Mail explains that when China has been selling U.S. Treasury Bonds, it has been shifting its assets from visible accounts into hidden ones. Here is a selection:
"We do not believe that the Chinese are dumping Treasuries,” Arthur Kroeber, managing director of GaveKal Dragonomics, a Beijing research firm, told Associated Press. “What they are doing is diversifying the channels through which they make these purchases so that it is much more difficult for the market to ascertain what they are doing.”
In other words, China is moving her money into eurodollar accounts (accounts in European and Asian banks that are denominated in dollars). These accounts usually invest their customers' dollars in U.S. money market funds and other U.S. financial assets, including U.S. Treasury Bonds. Miller says that there is some evidence that the Chinese are presently moving their money toward the longer-term yield end of the U.S. Treasury bond spectrum:
U.S. data show that China reduced its holding of Treasury bills in December by $34.2-billion (U.S.) – a 4.3-per-cent decline – which pushed it into second place behind Japan as the largest foreign holder of U.S. debt.
But the Chinese increased their holdings of longer-term U.S. government bonds, even though rates at the long end of the yield curve are expected to rise.
There is little chance that China will dump the dollar at the moment. America still has lots of industry left that the Chinese government wants to steal. And they are currently working hard to steal U.S. research and development facilities. Crashing the dollar, at the moment, would cause the U.S. economy and U.S. manufacturing to come roaring back, which would wreck Chinese plans.
Comment by Ken Hoop, 2/20/2010:
Denninger says get tough on China.
Response to this comment by Howard Richman, 2/24/2010:
Journal of Economic Literature:
Atlantic Economic Journal: