Showing posts with label US treasuries. Show all posts
Showing posts with label US treasuries. Show all posts

Friday, May 31, 2019

Why China's 'nuclear options' might not work - Victor Shih

Victor Shih
Devaluating the Yuan and dumping US treasuries regular pop up as 'nuclear options' China has in its trade war with the US. Financial and political analyst Victor Shih explains why that might be a wrong idea. "These options are not credible, because they conflict with other important policy objectives of China’s," he writes at the China File.
Victor Shih:
As the trade conflict between the U.S. and China heats up, observers in and out of China have speculated on two potential “nuclear options” that China may deploy: substantial devaluation of the yuan, and the dumping of China’s roughly U.S.$1 trillion in U.S. treasuries. Yet these options are not credible, because they conflict with other important policy objectives of China’s. Also, they would likely cause more financial harm to China than to the United States. Although Western policymakers generally underestimate the pain that authoritarian leaders can impose on their citizens with hardly any political repercussions, substantially slower growth would undermine Xi’s own ambition for China to be a great power. 
Yuan devaluation would severely jeopardize the relative stability in the foreign exchange market that Chinese regulators have tried hard to restore after 2015’s near crisis. Given that an exchange rate above 7 yuan to the dollar has not occurred at the end of a trading session for over a decade, devaluating the yuan past that point would be considered a “black swan” event by most of the trading algorithms, throwing the entire emerging market into turmoil. Devaluation to 25 percent would bring about even more dire consequences. For the past several years, Chinese banks and firms have borrowed close to two trillion dollars from offshore counterparts. Since much of this borrowing is in currencies linked to the dollar, a 25 percent devaluation would mean that Chinese debtors would need to pay 25 percent more in yuan to service their debt. Given the high domestic debt burden of the Chinese corporate sector, such a sudden increase in debt servicing would likely trigger a sizable wave of defaults by Chinese firms and even some financial institutions. Without a truly massive government bailout, which would deplete China’s foreign exchange reserve, many Chinese companies would be shut out of the global credit market for years—contravening Xi’s dictate to “hold the bottom line of financial stability.” 
Unwinding China’s roughly U.S.$1 trillion holding in U.S. treasuries would cause temporary turmoil in the treasury market and a temporary decline in the price of treasuries. However, as the lone determined seller, China would likely bear the brunt of the losses. If China decided to upset the treasury market, it would have to keep selling—even as treasury prices begin to decline. Thus, sellers in this initial period would bear the bulk of losses. Once market participants determined that China was selling for political reasons, they would begin to buy in earnest, taking advantage of the unusually high treasury yields. The Federal Reserve would then likely step in to buy, extinguishing any panic. China would bear the brunt of the losses in the initial period, and besides making headlines for a few days would gain nothing of consequence while losing billions. And what would China do with all the cash? If it invested the money in a dollar money market, U.S. banks would borrow the cheap money to buy up treasuries, which would also extinguish the panic.
More at China File.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more political analysts at the China Speakers Bureau? Do check out this list.  

Thursday, June 07, 2018

Why China will not sell off its US treasuries - Arthur Kroeber

Arthur Kroeber
More than once selling US bonds in the hands of China has been suggested as a powerful tool in the trade war with the US. But selling those treasuries does not make sense, says economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know® in the South China Morning Post.

The South China Morning Post:
In spite of policy and political uncertainty under the Trump administration, the liquidity and security that US Treasuries offer continues to be unrivalled by any other form of asset. 
Arthur Kroeber, co-founder and research head of Gavekal Dragonomics, said a Beijing sell-off of US Treasuries, which was utterly unlikely, would only make Beijing look reckless and foolish – the last thing Xi would want as China seeks to play the “good guy” in contrast to the unpredictable Trump. 
In addition, a big sale from China of US Treasuries in the open market would mean China would have to buy replacement assets, but none constituted a viable alternative, Kroeber said. 
It is not surprising then, that during the three rounds of trade talks between Beijing and Washington, neither Beijing nor Washington publicly made China’s holding of Treasuries as an issue for negotiation.
More in the South China Morning Post.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

Are you looking for more experts guiding you through the trade war between China and the US? Do check out this list .