Just when you might begin to wonder what could possibly be the latest nail in the coffin of the U.S. dollar, news breaks that China is now publicly considering walking away from the U.S. government debt market.
Last Wednesday Bloomberg reported that, “Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries.”
China is currently the largest foreign holder of U.S. government debt. Which is why it would be significant news if China does indeed stop purchasing, or even sell its existing holdings of U.S. treasuries. Keep in mind that the news comes at the same time that the Federal Reserve claims to be stepping away from the market as well. Which raises the question that many have wondered for years, yet still remains unanswered.
Specifically, if the Fed is walking away from the auction, and now the Chinese are doing the same, who’s going to buy all of the bonds?
For those who have been following China’s actions in recent years and buying gold along with one of the market’s largest participants, the news hardly comes as a surprise. In recent months China has continued the development and implementation of its PetroYuan, and now there’s the possibility that they may take their efforts to decouple from the dollar to the next level.
While the Bloomberg article suggests that a final decision has not been made, it’s interesting to consider the factors that Chinese officials might base their decision on.
“The officials recommended that the nation closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world’s two biggest economies when deciding whether to cut some Treasury holdings.”
If that’s indeed the case, it’s not hard to imagine how this will play out. In Washington lawmakers remain paralyzed to even agree on how much to increase spending, let alone actually make cuts. At the same time political tension between the U.S. and China continues to grow. So while the suggestion is that there is a possible resolution, there’s virtually nothing to suggest that the conditions required for such an outcome will manifest.
Of course if you were expecting the sort of response that one might hope for from a creditor who has been living dangerously outside of his means, consider the broken record response Bloomberg cites from a U.S. treasury official.
“The U.S. Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market,” said Under Secretary for International Affairs David Malpass.”
Obviously this ignores how the perceived ‘economic strengthening’ is based primarily on low interest-rate and cheap Federal Reserve credit. It also ignores that, “the Treasury Department said in its most recent quarterly refunding announcement in November that borrowing needs will increase as the Federal Reserve reduces its balance sheet and as fiscal deficits look set to widen.”
A last note is that Bloomberg attached a short video clip to the article in which anchor Tom Keene asked, “if they’re not going to buy U.S. paper, what do they buy instead?”
Rather than suggesting an answer myself, instead I’ll just leave you with the following chart. Which gives a strong indication of one of the primary markets into which China would be likely to reallocate its investment funds.