As we all know by now, China holds a lot of our (a) Treasuries, (b) Agencies, (c) currency, and (d) corporate paper. A lot.
As reported by the polymathic David Goldman in his Asia Times blog, the Chinese have apparently decided to divest themselves of US corporate paper and asset-based debt instruments and invest in exchange-traded stocks with good upside regardless of the prevailing economy.
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.
The question is, of course, why the change? Is it simple risk-aversion or something more sinister? As Goldman observes, the Chinese generally don’t mix politics and investment – making money is, after all, something best done with a clear head. However, there’s this disturbing news report from Reuters:
Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.
The calls for broad retaliation over the planned U.S. weapons sales to the disputed island came from officers at China’s National Defence University and Academy of Military Sciences, interviewed by Outlook Weekly, a Chinese-language magazine published by the official Xinhua news agency.
I fear – not unreasonably so – that we’re losing control of our own destiny.
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