One mistake I may have made in the two years I have been writing publicly is taking the rhetoric of the Chinese and Russian governments a little too seriously, particularly over their relationship with the United States and the dollar.
Back in 2011, both China and Russia made a lot of noise about dumping US debt, or at least investing a lot less in it. Vladimir Putin said:
They are living beyond their means and shifting a part of the weight of their problems to the world economy. They are living like parasites off the global economy and their monopoly of the dollar. If [in America] there is a systemic malfunction, this will affect everyone. Countries like Russia and China hold a significant part of their reserves in American securities. There should be other reserve currencies.
And China were vocally critical too:
China, the largest foreign investor in US government securities, joined Russia in criticising American policymakers for failing to ensure borrowing is reined in after a stopgap deal to raise the nation’s debt limit.
People’s Bank of China governor Zhou Xiaochuan said China‘s central bank would monitor US efforts to tackle its debt, and state-run Xinhua News Agency blasted what it called the “madcap” brinkmanship of American lawmakers.
But just this month — almost two years after China blasted America for failing to cut debt levels — China’s Treasury holdings hit a record level of $1.223 trillion. And Russian treasury holdings are $20 billion higher than they were in 2012. So all of those protestations, it seems, were a lot of hot air. While it is true that various growing industrial powers are setting up alternative reserve currency systems, China and Russia aren’t ready to dump the dollar system anytime soon.
Now, the Federal Reserve has to some degree further enticed China into buying treasuries by giving them direct access to the Treasury auctions, allowing them to cut out the Wall Street middlemen. Maybe if that hadn’t happened, Chinese Treasury ownership would be lower.
But ultimately, the present system is very favourable for the BRICs, who have been able to build up massive manufacturing and infrastructural bases as a means to satisfy American and Western demand. In that sense, the post-Bretton Woods globalisation has been as much a free lunch for the developing world as it has been for anyone else. And why would China and Russia want to rock the boat by engaging in things like mass Treasury dumpings, trade war or proxy wars? They are slowly and gradually gaining on the West, without having to engage in war or trade war. As I noted in 2011:
I believe that the current world order suits China very much — their manufacturing exporters (and resource importers) get the stability of the mega-importing Americans spending mega-dollars on a military budget that maintains global stability. Global instability would mean everyone would pay more for imports, due to heightened insurance costs and other overheads.
Of course, a panic in the Chinese mainland — maybe a financial crash, or the bursting of the Chinese property bubble — might result in China’s government doing something rash.
But until then it is unlikely we will see the Eurasian holders of Treasuries engaging in much liquidation anytime soon — however much their leaders complain about American fiscal and monetary policy. Actions speak louder than words.
An increase of 0.7% seems to me to be more of a play on ‘staying diversified’ than anything else…. possibly even outright posturing at the request of the Fed. I don’t think any politician in his right mind would stand behind this as a long-term net positive under the gun.
If the Chinese wanted to hit the big read button tomorrow and just start dumping all that soon-to-be-junk-debt they’re stuck with, the world would be better off. There was a time in the supercycle when it was actually good quality paper – I think (I’m only 32). We all know those days are gone and most likely never coming back until things are radically different.
But tonight we dance…cheers to S&P 1615. What a joke it’s all become.
If China goes wild and starts liquidating, then maybe more would join in, and rates might rise. But they hold a lot, and I don’t think they want to start to jeopardise the price. And even if China did liquidate a lot, rates might fall back. Ultimately, interest rates are telling a big story — there are such high levels of excess savings that people are chasing yield, and Treasuries are the first place they’re looking. Ultimately markets like US debt right now, and for foreseeable future.
If they dump US debt then they get US dollars, but rates need not rise if the Fed keeps on printing dollars and buying the debt. Similarly, the US cannot default as long as the Fed prints.
Now if the Chinese sold dollars for other currencies, that’s something else.
Have your considered the quid pro quo whereby the US caps the gold price in exchange for China’s ongoing but waning demand for UST paper?
China probably does not want to rock the boat. Always good to have an escape pod ready.
First there was “Education” Visa’s
Now there is “Business” Visa’s
Didn’t Rome do the same thing 2000 years ago?
So I guess I was wrong for my past calls on a Yuan Reserve Currency. As I now adopt the line that Political leaders are criminals, only out for their own vested interest (Not the Nation’s) they will want to have the ability to flee to another “Safe Harbour”, I would say that the US WILL be the Reserve Currency of the future. It may be a Police State, but the wealthy will have a “Safe Harbour” in the West.
‘But ultimately, the present system is very favourable for the BRICs, who have been able to build up massive manufacturing and infrastructural bases as a means to satisfy American and Western demand.’
For sure the current system has benefited BRICs tremendously. More importantly though, I think it sets them up to thrive even more so in the future, provided their policymakers don’t mess things up.
I doubt China will dump treasuries en masse, but at the same time I wouldn’t expect anything more than marginal buying. They can continue to persist with the status quo until the American consumer becomes unable to afford Chinese imports. That’ll be the point the whole thing unravels, as it becomes obvious that the piles of USTs the Chinese own become less likely to be repaid with anything close to the same purchasing power as was lent. This, coupled with the collapse of the property market, will effectively be the ‘price’ China has paid for the establishment of the manufacturing and infrastructural powerhouse it has built.
The real payoff won’t come until after the dust settles from a property collapse and losses in their stock of USTs. An increasingly strong manufacturing base means they can still produce goods, but instead of exporting them to America, they can consume them domestically. This will be aided by the increases in purchasing power led by a rising yuan. Of course, the policymakers can stop all of this by intervening, in which case not only will domestic consumption be stunted, but the risks of igniting offshoring due to the search for even cheaper labor will rise. In other words, the pursuit of preserving ‘superficial’ engines of growth (asset prices), they might risk destroying the real engine of growth they worked so hard to establish.
Do you hear any billionaires in Russia or China complaining about the Fed’s money printing policy? The Elite are in it together.
If you were a billionaire in China, would you want anything to change?
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I believe the setting up of the BRICS development bank has something to do with this. The BRICS bank is funded by US Tbills. When the time is right, the rug will be pulled at this moment it isnt ready yet.
Chinese holdings have dropped significantly if you look at the long view, at once it was hovering at $3 Trillion, at only $1.233 T is pretty huge drop from where it was once.
As for rich Chinese and Russians immigrating, Russia and China is going through a political reform and leading to those being purged (and the well-connected to these purged oligarchs/politicians) leaving. A lot of these people will be caught with their pants down when they get cyprus’d like most people in the western world just as the rich russians immigrants found out in their recent experience in cyprus.
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