Forbes: China Won't Dump US Treasurys Because of Govt Shutdown

Wednesday, 09 Oct 2013 01:53 PM

By John Morgan

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China is willing to lecture the United States on its irresponsible government shutdown, but it is unlikely to engage in large-scale dumping of U.S. debt because that would end up harming China itself, Forbes reported.

Gordon C. Chang, an author of books about Asia and a Forbes contributor, said although China is by far the largest holder foreign owner of U.S Treasurys, it has already sold some without roiling the market.

He said official statistics show China held $1.2773 trillion in Treasurys at the end of July, down from a peak of $1.3149 in July 2011.

Editor’s Note: New Video: Obama Plans to Redistribute Seniors’ Wealth

“And now we know what happens if China stops buying Treasurys. Nothing will happen. It has, in fact, already stopped adding to its stockpile.”

In a recent editorial, the official Xinhua News Agency asserted, “The United States, the world's sole superpower, has engaged in irresponsible spending for years. With no political unity to redress its policy mistake, a dysfunctional Washington is now overspending the confidence in its leadership.”

There was apparently no rebuttal from Washington, D.C., where the White House and Republicans and Democrats in Congress had retreated to their respective policy bunkers to pursue budget brinksmanship.

Chang said China sometimes resorts to trading U.S. Treasurys anonymously in foreign debt markets such as London. But he said the impact is not huge because the total amount of U.S. debt securities is a titanic $33.7 trillion.

“If Beijing sold Treasury securities in massive quantities, it would cause a panic, but the world’s deep markets would quickly adjust. The Chinese, we should remember, would get back dollars.”

If the Chinese then converted the proceeds into other currencies such as euros, pounds, francs and yen, those countries then could be forced to enter the markets to rebalance their currencies by buying dollars, Chang said. Such actions could drive the value of the other currencies down.

“So why don’t the Chinese go nuclear? They know that in a short period calm would return to the markets, America’s debt would end up held by its friends, and they would be stuck with a wide variety of assets their managers had shunned in the first place,” he concluded.

The dollar declined Monday, near an eight-month low against other major trading currencies, Reuters reported. Investors have crowded into safe-haven currencies such as the yen and franc on account of uncertainty around the U.S. government shutdown.

Bloomberg reported rates on U.S. Treasurys have declined and volatility has eased in recent days, which it concluded is a sign that investors trust the Federal Reserve more than they distrust Congress’ willingness to solve the budget stalemate.

Editor’s Note: New Video: Obama Plans to Redistribute Seniors’ Wealth

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