tag:blogger.com,1999:blog-4704148890264843595.post79142596363019637..comments2024-03-27T03:46:07.097-07:00Comments on Raman's strategic analysis: ECONOMICS, NOT POLITICS SHOULD DICTATE US BOND HOLDINGS, SAY CHINESE ANALYSTSB.RAMANhttp://www.blogger.com/profile/12278000644746170031noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-4704148890264843595.post-14865066060502256402010-02-24T23:38:07.860-08:002010-02-24T23:38:07.860-08:00It’s actually a myth that China has reduced its ex...It’s actually a myth that China has reduced its exposure in US treasury Bonds. Actually its vice-versa. It is very beautifully explained by economist prof. Michael Pettis. I can’t put better than him hence putting some of his points as above:<br />“……China did not reduce its dollar holdings<br />So was China a net seller of dollar assets in December? Almost certainly not. Just look at the PBoC balance sheet. PBoC reserves rose in December by $61.3 billion, of which $39.0 billion was the trade surplus. <br />Remember that China has a large current account surplus which necessarily must be recycled abroad, and the US has a large current account deficit which necessarily must be funded abroad. It would be astonishing if, under these circumstances, total Chinese holdings of USD assets declined, and of course it is impossible that they declined faster than the willingness of other foreigners to replace them.<br />Of course if the US current account deficit declines, net new foreign purchases must by definition decline too. If the US wants its current account deficit to decline so that the USG can reduce the fiscal spending needed to generate any fixed number of jobs, this cannot possibly happen without a concomitant decline in net foreign, including Chinese, purchases of dollar assets. But it need not result in any difficulty in funding the new, lower amount of debt issuance. Depending on why it happens, reduced purchases by foreigners should probably be seen as a good thing for the US Treasury market, not a bad thing.<br />Confused? How can a reduction in foreign purchases help the USG fund its massive fiscal deficit? Because the purpose of the fiscal deficit is to create jobs in the US by boosting US spending. Since some of the jobs that higher USG spending creates will accrete outside the US, via demand that “leaks” abroad through the deficit and creates employment for foreign manufacturers, a smaller trade deficit can itself be expansionary for the economy. That means the USG will need to borrow less to create the same number of jobs. Fear of Chinese “dumping” of US treasury bonds, even if it were possible, should be a non-issue, but since it plays easily into various geopolitical conspiracies, we seem to love to worry about it needlessly.<br />Among other strange comments the TIC data generated last week were those by the Financial Times, arguing that “if the latest numbers mark the beginnings of a diversification by China away from US Treasuries and other dollar assets, a widely speculated rise in the value of the renminbi against the dollar is on the cards.” Aside from the fact that it marks the beginnings of no such thing, it still wouldn’t be an indication of any future RMB strategy. A rise in the value of the RMB may very well be in the cards, but this has absolutely nothing to do with what Beijing did with its USG bond holdings in December.<br />Why? Because if China had intervened less in December, the RMB would have already shot up – in December, not at some time in the near future. Of course if the PBoC believes that a rise in the RMB will cause the dollar to fall against the euro, it might have swapped out of dollars into euros as a clever trade based on its inside knowledge of the RMB strategy, but since the opposite is almost certain to be the case, it is hard to believe that any PBoC net sales of Treasury bonds would indicate its plan to raise the value of the RMB.<br />The TIC data in December tells us almost nothing about what will happen to the RMB. To see why, it makes sense to discuss a little how and why the PBoC has accumulated dollars, and what those dollars mean for China and the central bank. Here, the first thing to recognize is that the PBoC does not “decide”, as a banker, to lend money to the US. It basically has very little choice………….”<br /> I wish I could have pasted the full blog.(how wonderfully he has put it. Still those who wants to know more can visit http://mpettis.com. He is awesome.ambihttps://www.blogger.com/profile/09709973254351931979noreply@blogger.comtag:blogger.com,1999:blog-4704148890264843595.post-32521241561479569342010-02-24T19:56:31.356-08:002010-02-24T19:56:31.356-08:00i believe the timing off the Chinese sale is purel...i believe the timing off the Chinese sale is purely coincidental. The weakness in Euro has created a headlong rush of speculators and money to the relatively stable dollar. The price of the dollar has gone up and now is an excellent time to get out of the dollar. We have to remember - "if you owe the bank 1000$ the bank owns you, if you owe the bank 10000000$ you own the bank". right now, the chinese are as vulnerable as the americans with regard to the price of the $.Vijayhttps://www.blogger.com/profile/03790884680860098906noreply@blogger.com