Just a few days ago, the U.S. Treasury Department revealed that China actually REDUCED its note and bond holdings by $25 billion in June. Although China did NOT sell shorter-term Treasury bills — and isn’t expected to — it’s still the largest amount of Treasuries China has ever sold in a single month.
This is a huge development:
* In 2006, China and Hong Kong accounted for more than 50 percent of the increase in the amount of Treasury debt sold to the public …
* In 2008, their share had fallen to 22 percent as the U.S. government increased its public debt by a record $1.2 trillion …
* In the first half of THIS year, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasury bonds that were sold — and now …
* In June, China became a net SELLER of U.S. Treasury notes and bonds!
That's actually big news. China isn't so interested in financing US debt any more, which is going to severely cramp the US economy (which is largely credit based). While they're too smart to crash the US economy, they're appearing much less enthusiastic to fund it by buying debt.
China is concerned about the Federal Reserve's policy of printing money to buy Treasury debt. That's a tricky thing to do. It's very easy to miss the tipping point and devalue the dollar so much that aggressive inflation is the result.
The 25 billion is a meaningless sum though, monetarily. It was done as a message to the US. It was designed to be large enough to let the US know China can move out of US bonds fast if it has too. And small enough to let the US know China doesn't want to move out of the bonds (hell, most of its foreign reserves are US bonds). On that note, China would take a huge hit if they dumped $2 trillion dollars of devalued US bonds on the market... there's no economy large enough to absorb that amount. They really wouldn't tank their economy, since the money is reserves, but they'd destroy the ability of the US to issue debt and finance itself.
China needs (or desires is a better word) the dollar to stay relatively healthy. Aggressive inflation will cause the dollar to fall... hard. Printing money to buy debt is a sure way to inflation if left unchecked. This is China's way of saying "please don't put us in the position of having to fuck you over."
Correction Mr. President, I DID build this, and please give Lurker a hug, we wouldn't want to damage his self-esteem.
On that note, China would take a huge hit if they dumped $2 trillion dollars of devalued US bonds on the market... there's no economy large enough to absorb that amount.
Exactly. I think they want to start financing their own economy more than the US economy now, so you'll see a slowdown on US bond purchases from China, which will pump up US interest rates. It doesn't mean there won't be a recovery, just that it will likely be a long and measured process.
