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Thread: Chinese Divesting Out of All Non-USG Guaranteed Securities?

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    Default Chinese Divesting Out of All Non-USG Guaranteed Securities?

    http://www.zerohedge.com/article/chi...+drops+to+zero)

    The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested

    "Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt."

    "From Asia Times:

    Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

    It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event."

    "One thing is certain - China will now focus on doing precisely the opposite of what America would urge Chinese authorities to do, in order to establish itself as the focal point of negotiating leverage and increasingly humiliate the Obama regime. If this involves selling USTs or corporates (both fixed income and equities) so be it. "

    "It is not clear when the asset divestiture directive takes place or if it is already being enforced. Juding by the afterhours action in futures and the currency markets, some dumping may already be taking place. Alternatively, we now know just who it is that sell into every rally (yes, even in this market, every buyer is matched with a seller).

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    Default Re: Chinese Divesting Out of All Non-USG Guaranteed Securities?

    the 'gold foil hat' crowd would probably tell you that after recent economic events in Dubai, Greece and the US, China is now posturing itself to pull back from all investments denominated in inflation prone debt laden 'Western' currencies. However, they dare not dump US gov't debt they own since they need to 'cash in' their US dollar denominated trade surplus dollars while the US dollar is still 'worth something' ( but the Chinese have clearly stopped buying additional US gov't debt on future inflation fears ).

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    Default Re: Chinese Divesting Out of All Non-USG Guaranteed Securities?

    China fortunately for the USA takes the long view, so it means a deleveraging in slow motion, with an emphasis on not crashing the dollar, but unwinding support for most of the the privately issued asset back securities (icredit cards, RV's, water toys, electronics) that underpin the overpampered american consumer economy, so the bottom line is at least a 20 yr period of slow growh in the United States. Since most americans never understood how overleveraged everything became, and neither political party really explained it, its going to be quite a shock when they finally figure it out. Deleveraging is not very enjoyable.

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    Default Re: Chinese Divesting Out of All Non-USG Guaranteed Securities?

    ^^^ well, the larger point to be taken is that, for the past 10 years at least, American consumers have been spending something like 6% more money than they actually earned ... which was made possible by consumers assuming and compounding an ever larger pile of debt. While the American consumers may not understand the implications, the Chinese certainly do. What the Chinese and anybody else with a calculator and clear facts understands is that Americans simply cannot continue consuming at anywhere near recent levels, that Americans on the average have assumed more debt than they are actually able to repay, and that the 'paper' behind this American consumer debt is therefore of dubious value.

    What American consumers will be forced to understand is that the future availability of new consumer loans / debt will be restricted and expensive. What American consumers will be forced to understand is that the standard of living they have enjoyed over the past decade is unsustainable going forward. And eventually what American consumers will be forced to understand is that, not only have they taken on high levels of debt themselves, but their gov't has taken on even higher levels of debt on their behalf - gov't debt which, unlike their unserviceable personal debt that can be discharged via bankruptcy, will continue to consume an ever larger amount / share of their tax money to service.

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    Default Re: Chinese Divesting Out of All Non-USG Guaranteed Securities?

    Melonie- Foreign demand for U.S. Treasuries fell by the largest amount on record in December according to the Treasury Dept. Foreign holdings of U.S. Government Debt fell by $53 billion in December. CHINA reduced its holdings by $34 billion to $755 billion and is now behind Japan in total holdings.

    If China is serious and they continue to dump U.S. gov't securities; and if there is another bond auction like the last one, interest rates will go up. That will increase the cost of servicing the National Debt.
    Last edited by Eric Stoner; 02-18-2010 at 02:56 PM.

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    Default Re: Chinese Divesting Out of All Non-USG Guaranteed Securities?

    Yeah I saw the news release that both China and Japan divested themselves of some US dollar denominated treasuries and agency bonds. I also noticed that the US dollar exchange rate plunged about 4% and that US stock markets rebounded by 3%. The 'gold foil hat' crowd will tell you that all of these are the direct result of international US dollar devaluation which occurred as a result of the negative US gov't bond action.

    However, there are a huge number of people out there that think that a 3% US stock market gain ( even in the presence of a 4% US dollar devaluation ) is a 'good' thing. Of course this is reinforced by the time delay that always exists between a devaluation of the US dollar causing commodity prices to rise, but only eventually causing prices of finished products to rise ( which makes the cause and effect relationship a bit harder to see).

    As noted in the 1.5 trillion dollar bailout thread, it appears that the US fed has been working around the reluctant foreign bond buyers by essentially buying it's own freshly printed US bonds with equally freshly printed US dollars. As long as this continues it will keep interest rates from rising, but instead accelerate future US dollar devaluations.

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