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China Considers Halting Purchase of U.S. Debt

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China Considers Halting Purchase of U.S. Debt

Unread postby vox_mundi » Wed 10 Jan 2018, 10:50:11

China Weighs Slowing or Halting Purchases of U.S. Treasuries

China added to bond investors’ jitters on Wednesday as traders braced for what they feared could be the end of a three-decade bull market.

Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter. The news comes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus. Yields on 10-year Treasuries rose for a fifth day, touching the highest since March.
"If China stops buying Treasuries, the market could suffer. Treasury financing needs are going to rise significantly in 2018 and beyond relative to recent history, so Treasury is going to be looking for as many sources of demand as they can find"

China holds the world’s largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the officials’ recommendations have been adopted. The market for U.S. government bonds is becoming less attractive relative to other assets, and trade tensions with the U.S. may provide a reason to slow or stop buying American debt, the thinking of these officials goes, according to the people, who asked not to be named as they aren’t allowed to discuss the matter publicly. China’s State Administration of Foreign Exchange didn’t immediately reply to a fax seeking comment on the matter.

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The officials recommended that the nation closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world’s two biggest economies when deciding whether to cut some Treasury holdings, the people said.

A top Treasury official signaled confidence in the U.S. government debt market, which at $14.5 trillion is the world’s largest.

“It’s a complicated chess game as with everything the Chinese do,” said Charles Wyplosz, a professor of international economics at the Graduate Institute of International and Development Studies in Geneva. “For years they have been bothered by the fact that they are so heavily invested in one particular class of U.S. bonds, so it’s just a question of time before they would try to diversify.”

“If China ceases to be a net purchaser of U.S. Treasuries, this is unlikely to have a significant impact on the overall yield curve unless China divests a large share of its total holdings in a short time period,” said Rajiv Biswas, Singapore-based chief Asia-Pacific economist at IHS Markit.


U.S. Debt to China: How Much Does It Own?

... China held $1.3 trillion in U.S. debt in November 2013. The reason China is reducing its holdings is to allow its currency, the yuan, to rise. To do that, China has to loosen its peg to the dollar. That makes the yuan more attractive to forex traders in global markets.

Long-term, China wants the yuan to replace the U.S. dollar as the world's global currency.

The U.S. debt to China is $1.2 trillion as of October 2017. That's 19 percent of the $6.3 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $20 trillion national debt is owned by either the American people or by the U.S. government itself.

China is more than happy to own almost a third of the U.S. debt.

Owning U.S. Treasury notes helps China's economy grow by keeping its currency weaker than the dollar. It keeps Chinese exports cheaper than U.S. products. China's highest priority is creating enough jobs for its 1.4 billion people.

China's position as America's largest banker gives it some political leverage. Now and then, China threatens to sell part of its debt holdings. It knows that if it did so, U.S. interest rates would rise. That would slow U.S economic growth.

China would not call in its debt all at once. If it did so, the demand for the dollar would plummet like a rock. This dollar collapse would disrupt international markets even more than the 2008 financial crisis.

China's economy would suffer along with everyone else's.

It's more likely that China would slowly begin selling off its Treasury holdings. Even when it just warns that it plans to do so, dollar demand starts to drop. That hurts China's competitiveness. As it raises its export prices, U.S. consumers would buy American products instead. China could only start this process if it further expands its exports to other Asian countries and increases domestic demand.
“There are three classes of people: those who see. Those who see when they are shown. Those who do not see.” ― Leonardo da Vinci

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Re: China Considers Halting Purchase of U.S. Debt

Unread postby Outcast_Searcher » Wed 10 Jan 2018, 17:10:33

vox_mundi wrote:China Weighs Slowing or Halting Purchases of U.S. Treasuries

China added to bond investors’ jitters on Wednesday as traders braced for what they feared could be the end of a three-decade bull market.

As we're told each year since 2010, except the FED will supposedly do it.

The Chinese would be doing us a FAVOR if they did this.

Anyone buying long term treasury bonds at today's prices that doesn't understand what happens if the FED actually raises interest rates significantly over the next few years DESERVES to lose a lot of money.

So not exactly the sword of doom advertised, but certainly a possibility, that I'd think would be a very good thing over, say, the next decade -- the return to "normal" interest rates.
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