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Thursday, August 4, 2011

China moving away from US Treasuries – Dollar Crash imminent?

BEIJING - Chinese officials and economists expressed concern about further uncertainty in the US economy despite the debt ceiling being lifted. A bipartisan bill to raise the debt ceiling by $2.4 trillion to $16.7 trillion and cut the deficit by $2.1 trillion over a decade was signed by US President Barack Obama at the White House on Tuesday just hours before the deadline. However, Chinese rating agency Dagong Global Credit Rating Co responded with a rating downgrade of US sovereign credit from A+ to A.
The raising of the ceiling does not reverse the trend of debt growing faster than the US economy and actually marks a decline in the ability of Washington to pay its debts, Beijing-based Dagong said in a report.
Zhou Xiaochuan, governor of the People's Bank of China, the central bank, said on Wednesday in a statement on the bank's website that the progress made in raising the debt ceiling and cutting the deficit was "welcome", but also urged the US to handle its debts responsibly.
He added that any uncertainty or fluctuation in the securities market would undermine financial stability and hinder global economic recovery.

"Meanwhile, we will continue diversifying our foreign reserve management and intensify risk control, so as to minimize the impact of fluctuation in global financial markets," Zhou said.

China is by far the largest foreign holder of US debt, with holdings of $1.16 trillion in May, US Treasury Department data showed. It is estimated that 70 percent of China's $3.2 trillion foreign reserves are dollar assets.

Ma Jun, chief economist for greater China with Deutsche Bank, said that a lower US rating will affect China mainly through trade, because if GDP in the US goes down by 1 percent, China's exports fall by 7 percent. Read Report

Reading between the lines of the comments by the governor of China’s Central Bank reveals official Chinese policy of diversifying away from the dollar. Since Euro and Japanese currencies are really no better than the US dollar, the choices available to China are rather limited. The Swiss franc, Canadian dollar or Australian dollar are not big enough to replace US dollar reserves for the Chinese. It would seem that China has been using their extensive dollar reserves to buy gold and other real assets such as great chunks of the continent of Africa. The Chinese signals are getting stronger and stronger that it is only a matter of time before they dump the dollar altogether. It is also apparent that since the US GDP has such an impact on Chinese exports that it is only a matter of time before the Chinese have no more surpluses due to their exports dropping dramatically. This will confront China with major domestic problems, so instead of buying foreign debt, they will be forced to spend their reserves domestically to maintain order at home. It is all but certain that the days of the US dollar as the world’s Reserve Currency are numbered. I am of the firm opinion that the US dollar crash will not be a gradual event but will come rather suddenly and will take most of the world by surprise. It may happen later this year or sometime next year but is unlikely to extend beyond 2012.

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