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China Devalues US Treasury Bonds

-- Posted Wednesday, 14 July 2010 | | Source:

By: Jake Towne

If one owes a bank a thousand dollars, he has a problem. But if one owes a bank a billion dollars, then the bank has the problem. From the four years I spent in China, I assure you this truism is not lost on the Chinese, though one must never forget the banks’ nifty little ability to create their own money.

While America tends to act rather brashly on the world stage – think Bush proclaiming “Mission Accomplished” in a jumpsuit in 2003, or Obama graciously accepting a Nobel Peace Prize while simultaneously expanding the ridiculous Afghanistan War – the Chinese government acts in a far more subtle manner.

The below chart shows the total US Treasuries owned by China which includes both Hong Kong and the mainland. In July 2009, the total was $1.051 trillion. In April 2010, the total is $1.052 trillion, and the trend is a flat plateau. The Chinese have wisely chosen to contain their US debt exposure by halting the purchase of dollars.

In February 2009, Luo Ping, director-general at the China Banking Regulatory Commission, said:

Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Of course, Ping was lying on two counts. First that US Treasuries were a safe haven – if Ping believed his own drivel, Chinese holdings would surely have increased during the past year to help pay for the Obama stimulus plan. Instead, Ping wanted other foreigners and his creditor, the USA, to continue to believe his feint.

Ping’s second lie was that US Treasuries were the only option. In May 2009, as I explained in “The Gold War – China and the US Treasury Market,” gold is a form of insurance to protect against sovereign defaults and money-printing by the Bernanke gang at the FED. Sure enough, shortly after Ping’s speech, China reported a near-doubling of its gold holdings.

This week Dagong Global Credit Rating downgraded its rating of US Treasury debt from AAA to AA with a negative outlook, and now rates Chinese sovereign debt slightly better than America’s. The Financial Times immediately downplayed the announcement by inferring the privately-owned Dagong is a creature of the Chinese government. While this is may be true to a large degree, this does nothing to change the message: China has downgraded our debt and has ceased increasing its Treasury holdings.

The FT concludes: “Despite the discredit the financial crisis has brought to the big three global ratings agencies [Standard and Poor's, Moody's, and Fitch], investors are still more likely to trust their ratings…” Lemmings off a cliff, but for each loser there is sometimes a winner.  Who will the winners be? TO BE CONTINUED…

Jake Towne


-- Posted Wednesday, 14 July 2010 | Digg This Article | Source:


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