There has been growing concern from Central Bankers around the globe about the safety of their investments in US Treasuries. China alone holds almost $700bn in such investments and has been very vocal about a) their dissatisfaction with US monetary policy which is viewed as debasing the dollar along with the value of China's US bond holdings and b) proposed a new global currency which wouldn't be affected by any changes in individual countries' policies. (See Article)
To reiterate the cause for concern: although the media is not spelling out the problem, it is evident to the substantial players: when the US Fed announces it will 'purchase' ~$1 Trillion in US Government bonds and other types of mortgage loans, what it is really saying is "The Fed will print dollars out of thin air which it will use to buy real assets". That is how they 'expand the money supply. Those freshly invented dollars are given to sellers of the assets, who then have more dollars to invest with. This is what is called Quantitative Easing. England, Switzerland, and Japan are doing it too. Just today, the Treasury of England announced that in a federal bond sale today, not enough buyers came to the table to buy all of the bonds England was offering (See Article). If that begins to happen in the US, the Fed will have no choice but to turn the printing presses on full tilt.
This brings me to China's huge potential move: it is no secret that China feels boxed in when it comes to US Treasuries. If it stops buying US debt in the form of Treasuries, the US consumer won't have credit to buy cheap Chinese goods which would hurt China's exports further and it would cause the value of Treasuries to drop, from less demand. That would hurt China's own reserves, given, as noted above, China owns such a large pile of such US debt. China, however, also realizes that the US is indeed using quantitative easing which is devaluing the value of those holdings anyway.
For some perspective, though, realize that of China's total reserves of ~$1.9 Trillion, only $694 Billion is in US Treasuries, or roughly 33%. What if, in one fell swoop, China made the decision to free itself from the bonds of its holdings in US Treasuries and did one MASSIVE write-off, just like banks do when they sustain losses which then allow the bank to move forward.
In this scenario: China's reserves would instantly lower to $1.2 Trillion, not a paltry sum by any measure, the dollar would get crushed pushing up the value of other currencies measured against dollars, the US would be on sale because the value of US assets would be dirt cheap in Chinese currency terms. I argue that China could easily make up its $700bn loss in treasuries a) because the value of the remaining $1.2 trillion would probably increase given it is in other assets and b) China could then scoop up US assets at pennies on the yuan (their currency). They would be free from the burden of holding depreciating US debt and could instead invest directly in consumption and production in their own country, rather than be held hostage by the US consumer-based economy. If they coupled this will allowing the yuan to float freely and rise probably 40%, China would find itself in the drivers seat of global consumption and purchasing power.
I recognize this is a very out-of-the-box idea which I have not read in any media outlets. But given the climate of global write-downs, it is an idea I think the Chinese could consider, although it would have devastating consequences on the US. The world's largest single write-down could be in the offing. I certainly don't want to be a Treasury bond holder these days.
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