Is China Ready To Pull The Plug?

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Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Is China Ready To Pull The Plug?

http://www.zerohedge.com/news/guest-post-china-ready-pull-plug

 

There are two mainstream market assumptions that, in my mind, prevail over all others. The continuing function of the Dow, the sustained flow of capital into and out of the banking sector, and the full force spending of the federal government are ALL entirely dependent on the lifespan of these dual illusions; one, that the U.S. Dollar is a legitimate safe haven investment and will remain so indefinitely, and two, that China, like many other developing nations, will continue to prop up the strength of the dollar indefinitely because it is “in their best interest”. In the dimly lit bowels of Wall Street such ideas are so entrenched and pervasive, to question their validity is almost sacrilegious. Only after the recent S&P downgrade of America’s AAA credit rating did the impossible become thinkable to some MSM analysts, though a considerable portion of the day-trading herd continue to roll onward, while the time bomb strapped to the ass end of their financial house is ticking away.

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Thanks Johnny

That was an interesting article.

Travlin

neutrino's picture
neutrino
Status: Bronze Member (Offline)
Joined: May 10 2009
Posts: 29
Do the math

 I don't think the author of that article appreciates why the Chinese have accumulated US Treasuries in the first place.  China buys US debt as an accounting function to maintain their peg while enjoying a China/US trade surplus (US trade deficit).  By China artificially pegging the RMB to the US Dollar they have experienced decades long exchange rate advantages resulting in explosive Chinese exports, manufacturing and jobs far more competetive than the US equivalents.  So how can they accumulate so many US dollars while still maintaining the RMP pegged artificially low?

China purchases US debt largly as a function of their artificial peg.http://globaleconomicanalysis.blogspot.com/2010/07/should-china-dump-dollars-for.html

So while it's easy to poo-poo poor US fiscal policies lets not forget China is at least a co-conspirator, if not the original architect of the China/US debt reinvestment cycle.   I think one is better to ask the question "When will China decide to give up it's exchange rate advantage?" Phrased that way (and in light of China's slowing economy) the answer is more likely "Not anytime soon".

The US would welcome a stronger RMB.  Really, does the US lose if the Chinese reduce it's UST holdings?  We've been pushing them to float their currency for years!  

 

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