In the current economic crisis and volatility which was caused from China’s devaluing its Yuan to prop exports and all the corrections that came with it, the upcoming threatening capital-market-centrally-controlled-nation intends to withdraw its US Treasury commercial papers and risk a trigger of further economic uncertainty.
CNN money story:
China is dumping U.S. debt
By Matt Egan @mattmegan5
It’s no secret that China is the largest holder of U.S. debt.
So should Americans be concerned that China has started dumping some of its Treasury holdings?
After all, it raises serious questions about whether China will keep lending Washington money to help finance the federal deficit in the future.
But right now, China is selling because it’s in dire need of cash. Recently, it unleashed multiple moves to support its markets and prevent its currency from a freefall, while at the same time trying to stimulate the economy.
China yanks record sum from war chest
China owned $1.3 trillion of U.S. Treasuries as of June, making it the biggest holder of U.S. debt.
But China’s foreign-exchange reserves plunged by a record $94 billion in August, according to the country’s central bank, leaving it with a war chest of $3.6 trillion. Analysts say it’s very safe to believe a big chunk of that decline occurred due to a reduction in U.S. Treasury holdings.
The selling and the potential that China will not be buying U.S. debt in the near future raises questions on its potential to increase America’s borrowing costs.
Some of this might already be happening, at least at a small scale. When stock markets are turbulent, investors usually rush to the safety of U.S. Treasurys and yields fall. However, despite August’s extreme stock volatility, rates on Treasurys actually rose slightly in late August.
Part of that move is likely due to Wall Street betting the Federal Reserve may raise interest rates next week. But market participants also suspect the unusual action in the bond market was driven by China dumping Treasuries.
Related: China is the scariest threat to stocks since 2009
China is raising lots of cash
This time, Beijing is cutting its Treasury holdings out of a weakened position as it tries to stave off more declines in its currency. China is also propping up its stock market, which lost half its value in the span of just a few months this summer.
“Capital outflows have skyrocketed in China and the yuan is under intense selling pressure. The only thing they could do is sell Treasuries to buy their own currency,” said Walter Zimmerman, chief technical analyst at United-ICAP.
Related: China has spent $236 billion on its stock market bailout
China isn’t trying to sink the U.S. economy
There have long been concerns that China could sink the American economy by unloading its gigantic holdings of Treasuries, sending borrowing costs skyrocketing.
Thankfully, those doomsday fears don’t appear to be at play here yet.
“If China’s U.S. Treasury stock is a nuclear bomb, moderate sales to offset selling pressure on the yuan are unlikely to set off an explosion,” Michael McDonough, chief economist at Bloomberg Intelligence, wrote in a recent report.
But moves could raise borrowing costs here
Still, China’s sales could make Treasury yields higher than they would normally be. That’s of concern because Treasury rates are used as a benchmark that set the cost of borrowing for items like credit cards and mortgages.
While it’s “not the end of the world,” SkyBridge Capital senior portfolio manager Troy Gayeski said higher yields could lead to a “slowdown in the housing recovery.”
What’s key is how much cash China ultimately needs to raise to defend its currency and stock market. No one, not even China, knows that figure.
Related: Loud chorus of voices tell Fed: ‘Don’t do it’
China may go on a U.S. debt diet
So far, the American bond market seems to be taking the China move in stride.
The yield on the 10-year Treasury note is currently sitting at 2.22%, about unchanged from a month ago.
Demand for U.S. debt is healthy now especially when compared to the ultra-low, or even negative rates in other economic powerhouses like Germany and Japan.
Policymakers in Washington should hope that trend continues. Now that China’s economy is in disarray, America might not be able to count on its No. 1 lender to gobble up U.S. debt like in the past.
“China’s surplus is slowing. That gives them less firepower to accumulate Treasuries,” said Thomas Urano, managing director at Sage Advisory.
The dumping of US Treasury bonds by China would trigger a sporadic activity to gain from the yield of these bonds. That would gradually trigger the USD to rise against other currencies. That would spiral the current global economic crisis into another vicious cycle.
China economy economic slowdown triggered a global stock market slide and affected many currencies. As a result, China injected monies which came from several pension funds to prop the stock market and to invoke interjection into the economy.
China is said to have a lot of problems without real monetary policy. Hence, the economy is expected to slide further.
China’s economy isn’t getting any better
by Laura Lorenzetti @lauralorenzetti SEPTEMBER 10, 2015, 12:41 PM EDT
The data looks grim.
China’s economy has been on a rollercoaster ride for the past few months, and the latest data out of the world’s second largest nation isn’t getting much better.
Here’s a quick rundown on the situation.
Since mid-June, the main stock index in Shanghai is down about 40%. Its stock-index futures market, the world’s biggest, hit record lows on Wednesday after falling 99% from June highs.
At the same time, the nation has struggled to stabilize its currency. The People’s Bank of China (PBOC) devalued the yuan by about 2% in early August, an unexpected move that brought the currency’s value closer to what the market believes it ought to be. It also may help China’s export sector.
But Chinese officials have been intervening to stop the yuan from going into freefall, which led to a $94 billion decline in its foreign currency reserves last month.
The greatest risk currently for China is deflation, which could slow economic growth considerably.
China’s Producer Price Index (PPI), a measure of change in the price companies receive for their output, fell 5.9% in August, a much steeper decline than expected. The drop cut into profits at Chinese firms, which has already led to layoffs.
Still, consumer prices actually gained last month, mostly due to soaring food prices. Non-food inflation remained unchanged at 1.1%.
So, what is China doing about it?
China’s Premier Li Keqiang went on the record saying the nation won’t pursue a quantitative easing policy, but that doesn’t mean the government is standing idly by. There have been several interest rate cuts this year, and Chinese officials are organizing debt swaps with local Chinese governments to boost investments.
Meanwhile, when the market was dissolving, the PBOC also jumped in to inject funds into a state-owned entity that lends to brokerage firms as a stabilization effort.
Could this affect the U.S.?
Fortune’s Chris Matthews took a deeper look at the issue, finding that China accounted for a third of global growth this decade compared to just 17% for the U.S. China’s fate will weigh heavily on the global economy, but given America’s low reliance on exports (only about 15% of GDP), it could affect the U.S. economy less drastically than it might other nations, particularly ones that rely on the export of commodities used in manufacturing.