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August 09, 2007
China Selling Treasuries?
Hmm. Can't say I'm wholly convinced by this argument.
While most experts remain sceptical that China would start aggressively
selling Treasuries - a move which could tip the US into recession - the
economic tension between the two nations will be closely watched by the
markets.
China holds just under $1 trillion of such Treasuries according to The Telegraph, although I have a feeling that might be total US bonds, or even total US $ bonds for, Bloomberg reports:
China more than doubled its holdings of Treasuries in the three years ended March 31 to $420 billion, according to U.S. government data.
Anyway, my question is, even if it's the higher number, would this really push the US into recession? Would someone selling $1 trillion of bonds cause that?
August 9, 2007 in Economics | Permalink
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Comments
Ok, it puts a lot of dollars on the market, pushes the value of the dollar down, makes US exports cheaper (two Boeing 747s for the current price of one?), boosts US employment.......
Where is the recession?
Oh, and has no effect on Chinas exports to the US because the yuang is tied to the dollar.
Posted by: Chris Harper | Aug 9, 2007 9:47:23 AM
"Ok, it puts a lot of dollars on the market"
I'd query that, the Chinese intend to sell these bonds, who says that they will sell them for USD? Or they might sell them for USD (which means that a pile of cash changes hands) and then promptly convert the USD to something else. Or buy up some more factories in the UK or Africa. Or they might just put all the coins and notes in a big safe and roll around in them.
So what happens next depends very much on what the Chinese do with the proceeds, is all.
Posted by: Mark Wadsworth | Aug 9, 2007 10:39:13 AM
China probably has a $1tr of US Treasuries, with the rest in euros and sterling. The Treasury data is quite incomplete. Brad Setser's your blogger for this.
The link between the yuan and the dollar wouldn't survive an aggressive selling policy, as its the buying policy that keeps the link in place. The potential for US recession is sharp rise in US borrowing costs, basically, and increase in the savings rate.
I don't know how much the impact would be, the US clearly could take some offsetting measures. A chinese revaluation would be good for europe though, which has had to take much of the currency adjustment strain.
Posted by: Matthew | Aug 9, 2007 10:41:43 AM
Mark's point is a good one. THey have to spend it on some kind of foreign asset. I've always thought the most likely was weapons, but I guess they could buy a 1/3rd of the Ft-se 100 or something.
Posted by: Matthew | Aug 9, 2007 10:44:30 AM
Selling the bonds pushes down the price, raises the yields. The yields are the benchmarks for all other debt (since the bonds are "risk free"). Corporate bond yields thus rise, risk spreads widen, and it becomes more expensive/harder/impossible to raise debt money, which retards investment, glues up the deal making process, etc. etc.
A classic credit crunch. Which you're going to see the effects of anyway, just worse if the Chinese give it a shove.
Posted by: Kay Tie | Aug 9, 2007 1:09:02 PM
Chinese purchases of US bonds have widely been thought to have helped keep down US interest rates over the past few years (inverted yield curve and so on). I think we can assume that if they were to offload the same bonds over a period of weeks or months the impact on borrowing costs would be huge and could well tip the US into recession.
But why would they do that? The economics all says no:
1) US is their 2nd biggest trading partner 2) They'd suffer huge capital losses on their reserves as they did the switch
3) Whatever they replaced the dollar bonds with (euros, equities, oilfields) would shoot up as they got going.
Posted by: Mark Williams | Aug 9, 2007 1:11:25 PM
I also wonder, if the US came to a war with China, say over Taiwan, would it/could it immediately repudiate, or at least put on hold, those debts? And if it could, could it persuade other countries that this was a one-off special, and they had nothing to fear?
Tim adds: Treasuries would fall through the floor if they diod that: another way of putting it is no, they couldn't persuade people so. Remember, when a bond is sold it doesn't get sold back to the Treausry, but to another wanna be bond holder. 1/7 th of all bonds on the market are now invalid? That'll sure kill the secondary market.
Further, I'm not even sure that you need to register your ownership of a Treasury....
Posted by: Matthew | Aug 9, 2007 1:26:48 PM
Matthew, that is an excellent point.
Of course the US would not default on the bonds (that would ruin their credit rating), but it could, for example, "fine" China a few hundred million in reparations and secure the unpaid fines against the bonds held by China. Obviously there would have to be some mechanism of preventing China from selling them on, details, details.
Posted by: Mark Wadsworth | Aug 9, 2007 2:37:41 PM
The registration issue I'm not sure about - the Treasury's data is ownership based (and is also known not to be very accurate, but it presumably has some basis for its assertions).
But on the issue of a war, your points are correct, but on the other hand would US public opinion allow the Treasury to send its coupon payments off to a country they were fighting against?
Tim adds: I have a feeling that the Treasury information on ownership of Treasuries actually comes from the announcements by central banks of what they hold as foreign reserves.
Posted by: Matthew | Aug 9, 2007 2:38:28 PM
That's not the case - it includes private ownership too. However it looks like it's a survey of custodial owners, and not based on any registration system.
http://www.newyorkfed.org/newsevents/news/research/1998/rp980603.html
Posted by: Matthew | Aug 9, 2007 2:58:16 PM
On the other hand, the Treasury must have an address to send the coupon payments too, mustn't it?
Posted by: Matthew | Aug 9, 2007 2:59:54 PM
the information is held in the big securities depositaries - as Matthew says, the coupon cheques need to be sent. However, the depositaries will not draw you up a big list of owners in any other than extraordinary circumstances because these are meant to be bearer securities IIRC.
The effect of the Chinese dumping their holdings, btw, would be a currency crisis.
Posted by: dsquared | Aug 9, 2007 11:38:12 PM
