China to Sell U.S. Assets → Washingtons Blog
China to Sell U.S. Assets - Washingtons Blog

Wednesday, February 10, 2010

China to Sell U.S. Assets


Something big is happening in China which could have a huge effect on the American economy.

On Tuesday, Reuters reported:

Senior Chinese military officers have proposed that their country ... possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.

Now, Asia Times is reporting:

Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

As Alphaville's Tracy Alloway writes:
In terms of overall holdings of US securities, Standard Chartered estimates the country had about $1.44 trillion at the end of August ($34bn more than official data):

Nevertheless, China still needs US debt to help offset its massive FX reserves — which it continues to build. We doubt it has yet found a better place than the US market to recycle its currency inflows. And until there’s concrete evidence of net-selling of Treasuries, threatening to sell US debt remains simple sabre-rattling over American finances.

It does, however, say something about the wider (delicate) Chinese-US relationship.

***

Update: The European FX analysts at BNP Paribas seem to have confirmed the SAFE report:

Dollar-denominated risk assets, including asset- backed securities and corporate, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest themselves of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events. Meanwhile, the Chinese military has urged the government to sell US bonds, boosting defence spending on Taiwan arms deal. Hence, we watch US spreads intensively. A widening of spreads would not bold well for share markets while putting economic recovery at risk. It was US liquidity feeding financial markets until January this year. Hence a decline of risk appetite suggests repatriation flows moving back into the USD.

And see this.


5 comments:

  1. I wish they would free themselves of ALL US debt. It would only wake the US up a bit. This government is as bankrupt as our national finances are, and it's time to pay the band.

    Yes, it will hurt A LOT, but the current course of actions made by the US corporate government are surly to hurt far worse in the long run.

    America has a lesson to learn, and it looks like China is now in the position to take us to school.

    Children normally do not like school very much, but it's what's best for them that matters, so we make them go. It's time for America to learn it's leson.

    ReplyDelete
  2. The United States is in the position where not only is there no leverage against China, but in a few keystrokes on a computer China could metaphorically bring the United States to its knees.

    The full article is at http://www.examiner.com/examiner/x-25304-NY-Homeland-Security-Examiner~y2010m2d10-Terror-in-the-pits

    ReplyDelete
  3. Yes, as those of us over 45 know, 'it's time to pay the Piper'. Ever hear of the 'greater fool theory'...for years the Fed and Treasury thought they could pawn US debt to the world, given the AAA credit rating.

    What's truly scary today is that Geithner an Bernake both think like their predecessors, that the world has both the capacity and appetite for unlimited amounts of US debt. Well guess who holds the purse strings for the US economy now?

    ReplyDelete
  4. TOO LATE!

    "Fannie Mae Mortgage Buyout Plans Depress High-Coupon Bonds" -By Jody Shenn 02/10/2010

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a26XGdoDPm4w&pos=7

    ReplyDelete
  5. There is strong suspicion that China is accumulating significant stock ownership positions in most US firms:

    www.prof77.wordpress.com

    Given that bonds will lose value as interest rates rise, and given the FED's hints that they will raise rates soon, it makes sense for China to dump bonds and accumulate stock in firms.

    ReplyDelete

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