Please Sell Your Treasury Bonds, China

This will be a short post.  I am not worried about China selling its US Treasury bonds for several reasons:

  1. As they sell, the Yuan will rise versus the Dollar, which the Chinese Government does not want. Eventually their exports will fall, as US exports rise.
  2. After that, the Chinese Government faces a reinvestment problem.  What do they reinvest in?   The Euro is under threat, the Yen doesn’t want more investors, and the rest of the developed world’s currencies are in the stratosphere.

I think the threat of the Chinese Government to sell US Treasuries is empty.  They can’t do it without hurting themselves significantly.

Options:

  • Buy storable commodities, gold? Done that.  Hoard more?  At these prices?
  • Switch to other types of debt than government debt? After the brouhaha with Agency debt, I suspect they would be less than willing to wander off the beaten path.  Besides, they are pretty big, and they are dealing with thinner asset classes.  If they have driven up the prices of Treasuries, imagine what they could do to corporates?
  • Start buying companies around the globe?  If governments would let them, maybe, but there would be a political stink.
  • For a weird idea, China could buy surplus US housing and restore liquidity and collateral levels to a market in oversupply.  After a decade they get out at a profit, probably.

Also, the lower level of liquidity could be an issue if actions need to be taken to recapitalize their banks when the next crop of bad loans has to be reconciled in the next few years.

China’s options for holding the proceeds from its trade surplus are limited.  For all of their deficiencies, US Treasuries are a liquid and deep market.  Chinese exporters benefit from keeping the Yuan weak versus the US Dollar.  I don’t see things changing soon, absent a bolt from the blue.

About David Merkel 144 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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