Agoracom Blog

Why Are The Chinese Dumping U.S. Securities? Leverage Towards The End Game

Posted by AGORACOM at 12:46 PM on Wednesday, February 10th, 2010

Tyler Durden, Founder of Zero Hedge, has written a great article titled:  The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested.  The article stems from this story in Asia Times, which states:

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.

Durden goes on to add that One thing is certain – China will now focus on doing precisely the opposite of what America would urge Chinese authorities to do, in order to establish itself as the focal point of negotiating leverage.

I personally agree with the leverage angle.  There is a reason China has been around for 5,000 + years.  Many believe China put itself at risk by loading up on US Treasuries / Debt and is now in a “mutually assured destruction” relationship with the United States.  I don’t believe that to be the case. I believe China has smartly put itself in a position to dictate terms to the world’s current superpower and will be prepared to use that leverage if and when the day of reckoning comes when the world realizes the United States can no longer borrow its’ way to prosperity.

Yes, China will take a hit to its reserves when that day comes – but the payoff of placing itself at the helm while maintaining significant influence over a starving US economy will be well worth the price of admission.

Remember, the Chinese have only recently learned to enjoy a bit of “La Vida Loca” and can easily return to a more frugal existence in order to survive any global economic slow down brought about by flexing their leverage over the United States.

American society, on the other hand, invented La Vida Loca and would find it excruciatingly difficult to exist in a world without Starbucks, Louis Vitton and credit cards.  Enter Daddy Warbucks to save the day.


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