China getting antsy, we have alternatives....

[thriftyandboringinohio]

Re: China getting antsy, we have alternatives....

I may simply not get it, but how can they rely on themselves when they are addicted to export and cheap yuan? The Chinese people can't buy all the products they are producing, can they?

It seems self-evident they can be self-sustaining. They have an educated urban population of vast millions, equipped with the most advanced machines, buildings and management techniques, all fully trained and running them right now. Productive capacity-check.

Along with that an even larger population of rural poor eager for nice new things and a chance to work indoors, maybe even at a desk. Large domestic market with huge growth potential – check

Add a huge land mass and big piles of cash. Access to resources and capital –check and double-check.

When you think about it, it would be a miracle if they DON”T become a huge self-sustaining domestic economy.

[FRED]

Re: China getting antsy, we have alternatives....

I know there have been several threads about China telling the US to be "responsible" but this story actually has a former Chinese Central Banker stating that they have other options...

http://www.bloomberg.com/apps/news?p...er=patrick.net

"June 2 (Bloomberg) -- China’s former central bank adviser Yu Yongding will meet Treasury Secretary Timothy Geithner today and tell him the U.S. shouldn’t be complacent about China continuing to buy Treasuries.

“I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds’,” Yu said in an interview yesterday. “The euro is an alternative. And there are lots of raw materials we can still buy.”"

As of the end of March 2009 China held $768B in U.S. Treasury debt. Of that, $191B is short term debt. The proportion of China's Treasury debt holdings that are short term have increased from 10% in August 2009 to 25% by March 2009.

In August 2008, $52B in U.S. Treasury debt held by China came due. By March 2009, the monthly payable increased five fold to $250B.

No wonder Giethner's audience was laughing.

[phirang]

Re: China getting antsy, we have alternatives....

As of the end of March 2009 China held $768B in U.S. Treasury debt. Of that, $191B is short term debt. The proportion of China's Treasury debt holdings that are short term have increased from 10% in August 2009 to 25% by March 2009.

In August 2008, $52B in U.S. Treasury debt held by China came due. By March 2009, the monthly payable increased five fold to $250B.

No wonder Giethner's audience was laughing.

I'm not worried: old people will have the medical entitlements retrenched, taxes raised, intellectual property exported, and key strategic concessions will combine all satisfy our creditors.

If you don't think so, then why is Bechtel so busy building nuclear power plants in the GCC? :cool:

[sishya]

Re: China getting antsy, we have alternatives....

Not so fast calling demise of dollar and US Govt bonds says this level headed blogger looking at treasury auctions. The Bid to cover ratio for 10 Year Notes is around 2.5. so 2.5 people bid for a single bond. I am positioned - strong dollar(FXB put), strong US Bonds(TLT call), weak stocks(SSO put), weak Emerging stocks(EEM put), weak Gold miners(GDX put). But then I might be talking my position( as many people in Wall street do)


Tuesday, June 02, 2009

SMACKDOWN WEEK: China: If you leave now...

Thanks to the readers for all the e-mails so far. Most have concentrated on the problem of foreign ownership of U.S. debt, and the potential impact on the dollar should foreigners stop funding our profligate spending.
First, let's make a distinction between debt monetization and what the Fed is currently doing with their Treasury buying program. A classic debt monetization is a solution to overwhelming domestic debt. Its printing money to actually pay off the debt because the government has no other solutions. If you want to claim that the Treasury might someday get to this point, have at it. But its clear that in the here and now, the Fed's buying program isn't meant to solve the problem of deficit spending. The Fed wants to buy Treasury bonds in an attempt to put more money into the U.S. economy in the name of fighting deflation. It might also be an attempt to force interest rates lower, although I'm increasingly doubtful that is their intention. Either way, Treasuries are just serving as the helicopter out of which the Fed is throwing money. In other words, Treasuries are a means to an end. In a monetization, buying Treasuries is an end of itself.

That being said, its legitimate for foreign investors to fear the possibility of a monetization. I can't say its out of the realm of possibility, and if your China, it would be such a disaster, they have to be watching it.

Right now, I think the U.S. and China are living in a state of mutually assured destruction. China has too much invested in U.S. dollars, and thus can't afford to have it tank. Meanwhile the U.S. has borrowed too much from China. We can't afford to have the Chinese exit.

Therefore thinking about Chinese exit is a bit like thinking about a nuclear attack during the cold war. Can't deny the possibility, but it wouldn't be in anyone's interest to allow it to happen.

How worried are foreign investors? So far they are mostly just talking. Here is the bid/cover ratio on recent 2yr, 5yr, and 10yr auctions. If the Treasury is auctioning $20 billion and the bid/cover is 2, that means they they got $40 billion in total bids.



No obvious pattern here. Plenty of buyers for Treasuries. For me, I don't take much from any given bid/cover, because a bid at any price counts. I.e., if you bid 4% for the new 10-year, that counts as a bid, even if that's actually 40bps away from where the 10-year is. But as long as the bid/cover is solidly above 1, we aren't in danger of a failed auction.

Another worthwhile auction stat to watch is indirect bidders, where foreign central banks normally hide out.



No real pattern here either.

TIC data measures foreign buying directly, but its always a little dated. Anyway, here is net purchases (buys minus sales) of Treasuries. The red line is a 12-month rolling average.



Again, no obvious pattern of selling. Now if you want to see what foreign panic looks like, check out the chart on Agencies.



The Jutland Wastes are not to traveled lightly! I've heard the Russians blew out all their Agency positions entirely, but I've also heard Chinese insurers say they'd be a natural buyer of GSE debt if it were indeed full faith and credit. Part of this too reflects an overall decline in Agency issuance, but let there be no doubt, foreigners panicked after FN/FRE conservatorship.

The overall TIC does show some pattern of decline...



But it appears to reflect a change in risk tolerance. Since overall TIC is declining while Treasury purchases are about flat, it means that foreign portfolios are more heavily Treasury weighted than in the past.

I've said before that the dollar won't have the same dominance as a reserve currency in 25 years. But I be surprised if the impact is felt in any given year. The big foreign bond buyers have come face to face with a dollar disaster. Just because it didn't happen doesn't mean it won't result in changes. But they will be long-term changes. The kind that are hard to trade on.

To those who really fear a China sell-off, my challenge is to show me hard evidence that its happening.

[The Outback Oracle]

Re: China getting antsy, we have alternatives....

http://www.theaustralian.news.com.au...-36375,00.html

China and Malaysia discussing trading in each other's currency. Not going to immediately undermine the dollar that is for sure but there is certainly a trend.

[sishya]

Re: China getting antsy, we have alternatives....

http://www.theaustralian.news.com.au...-36375,00.html

China and Malaysia discussing trading in each other's currency. Not going to immediately undermine the dollar that is for sure but there is certainly a trend.

So now China is going to believe in the monetary and Poilitical stability of Malaysia over US Gov and Dollar ?

What happens when China exports and gets Malaysian currency, if there is trade surplus, how will china resolve it. will it have faith in Malaysia and buy Malaysian govt bonds or is Malaysia going to give some share of their rubber plantations, real estate... all these don't look easy and difficult to manage for china if it want to be trade surplus country. Maybe it is a trend, but It is so easy for all to just buy US Govt bonds... so you see how it all happened ?

[BiscayneSunrise]

Re: China getting antsy, we have alternatives....

It seems self-evident they can be self-sustaining. They have an educated urban population of vast millions, equipped with the most advanced machines, buildings and management techniques, all fully trained and running them right now. Productive capacity-check.

Along with that an even larger population of rural poor eager for nice new things and a chance to work indoors, maybe even at a desk. Large domestic market with huge growth potential – check

Add a huge land mass and big piles of cash. Access to resources and capital –check and double-check.

When you think about it, it would be a miracle if they DON”T become a huge self-sustaining domestic economy.

What he said

PS: "thrifty and boring"?. I like that.

[stranger_2]

Re: China getting antsy, we have alternatives....

It seems self-evident they can be self-sustaining.
[...]
:p:pWhen you think about it, it would be a miracle if they DON”T become a huge self-sustaining domestic economy.:p:p

Self-sustaining IN THE LONG RUN, sure. But that's not the point! I can only repeat: It's FUTURE growth and CURRENT decline/crisis.

Productive capacity-check.

And who is going to buy those products?

Along with that an even larger population of rural poor eager for nice new things

Eager, sure, but paying for them with what money?

and a chance to work indoors, maybe even at a desk.

Well, if unemployment starts growing rapidly they may become eager to have a job at all.

Large domestic market with huge growth potential – check

Again, LONG-TERM growth potential. 10 or maybe even 20 years ago they also had "Large domestic market with huge growth potential", a good base for long-term growth. But they decided to accelerate it a bit, didn't they?

Add a huge land mass and big piles of cash. Access to resources and capital –check and double-check.

But who has this capital? Government. Again, can Chinese people buy all the products they are producing (now, not in a long term)? Not really. To sustain the pre-GFC levels of production, not even mentioning it's growth, the government would have to start to subsidise the consumption (becoming new overconsumed USA?). If they don't it would have to fall, which would result in rising unempolyment - and that's something they can't really afford (remember, their real goal is staying in power, the economic growth is only a mean of achieving this goal, not the goal itself).

Not mentioning the "small problem" that this "pile of cash" is dollar-denominated.

[FRED]

Re: China getting antsy, we have alternatives....

I know there have been several threads about China telling the US to be "responsible" but this story actually has a former Chinese Central Banker stating that they have other options...

http://www.bloomberg.com/apps/news?p...er=patrick.net

"June 2 (Bloomberg) -- China’s former central bank adviser Yu Yongding will meet Treasury Secretary Timothy Geithner today and tell him the U.S. shouldn’t be complacent about China continuing to buy Treasuries.

“I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds’,” Yu said in an interview yesterday. “The euro is an alternative. And there are lots of raw materials we can still buy.”"

Why has PCE steadily declined in China during the era of rapid economic growth?

The Chinese economy is structurally an export economy. Turning it into an economy that supports a high level of internal demand is easier said than done.

[bart]

Re: China getting antsy, we have alternatives....

...
To those who really fear a China sell-off, my challenge is to show me hard evidence that its happening.

Yep... and here's the most recent picture of Fed custodials, which is a weekly measure of how much is coming in - Treasuries plus Agencies.

[touchring]

Re: China getting antsy, we have alternatives....

The US is not the only importer. The CCP is only concerned about social disruption and tensions that will jeopardize their power, they don't care if people go hungry or factories go bust. Once the old men are convinced that there is minimum risk of Tiananmen 2.0, nothing will stop them from doing as they wish.

Even though it was 20 years ago, we should not forget, this is the government that rolled tanks into a public square and killed hundreds of unarmed student when i'm sure there are easier and less deadly ways to end the protests.

Why has PCE steadily declined in China during the era of rapid economic growth?

The Chinese economy is structurally an export economy. Turning it into an economy that supports a high level of internal demand is easier said than done.