China: Flexing their Muscle

According to the latest data from Treasury, foreign investors were net sellers of U.S. dollars. The Madoff scandal led to a tremendous amount of liquidation by hedge funds in the Caribbean and Luxembourg but we have our eye on China. The Asian Giant continues to be a net buyer of dollar denominated investments, albeit at an increasingly sluggish pace. For the third month in a row, China has slowed their purchase of U.S. dollars. There are many reasons why their demand for dollars is waning, but don’t expect them to become net sellers of U.S. dollars anytime soon ahead of the Treasury’s report on Currency Manipulation next month.

With a month to go before the report is due for release, China is flexing their muscles. This weekend, Chinese Premier Wen Jiabao signaled to the U.S. that they are fully aware of the power they have on the U.S. economy and how the U.S. needs China just as much as China needs the U.S. He said that “we lent such huge funds to the United States, and of course we’re concerned about the security of our assets.” If China decided that U.S. investments are no longer safe, their liquidation would drive yields significantly higher and stocks significantly lower. The consequences of infuriating China are severe because they have the power to retaliate.

China’s continual accumulation of U.S. Treasuries is also political. With a growing U.S. deficit, there are much better ways for China to spend their money such as investing in resource companies. The sharp decline in Chinese exports also automatically reduce their need to weaken the Yuan by buying U.S. dollars. However for political reasons, the Feb and March TIC data should continue to report that China is a net buyer of U.S. dollars.

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  1. The Premier has legit concerns about the whole matter and I think that’s why the Obama Administration is doing its best to clean up the mess. However, China has to be reminded that their economic boom was in no small way contributed by the US in terms of the China goods consumed by the US economy. In the end of the Obama Administration ( 4 or 8 yrs from now ), most probably you would see a reduction of the trade deficit between both countries, as China lets its yuan strengthen against the dollar. In fact, I wager than the economic ties between both nations will be tighter than ever, and both countries, whether they like it or not, are dependent on each other even more nowadays.

  2. The TIC flow numbers were terrible yesterday. Net sales of long term equities and bonds totaled $43 billion in January compared with a positive $34.8 billion in December. Including short term securities into the picture, foreigners sold a net $148.9 billion. not looking good for funding our rapidly increasing debt. I dont know what China’s net was out of that.

    in other words, right when the US needs strong inflows, it’s getting outflows…


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