China Buys U.S.
Research for Online Investors

by John Dalt

9/22/09

According to the U.S. Treasury, China reduced their holdings of Treasury Bonds by $24 billion in June.  They increased purchases in July, closing the month with $800.5 billion dollars to maintain their position as the largest foreign holder of U.S. Treasury Securities.  China reduced their holdings in June and April.  These were the only reductions in the last twelve months.  When you are the largest owner, you are committed.  I am reminded of the old joke about the bank becoming your partner when you cannot pay him back.  Being the largest does not mean you have to keep buying.  What would happen if China decided to quit buying our debt?  What would happen if China decided to sell their cache of U.S. Treasuries?

The International Monetary Fund (IMF) is planning a sale of 403.3 tonnes of gold.  Market News International reported that China would consider buying all of it.  The Australian Wall Street Journal has the story, “China in the queue for IMF Gold Sale.”  The IMF wants to sell the gold to central banks in order to avoid disruption of the gold market.  China has increased their gold reserves by 76% since 2003, and presently has the fifth-biggest holdings by country.  403.3 tonnes of gold is valued at approximately $13 billion, a small purchase for China.

China can slow its buying of U.S. Treasuries over time and probably will not disrupt the markets, as other buyers would enter to take advantage of the higher yields that would result from fewer buyers.  China would have trouble “dumping” their holdings.  Large secondary sales of treasuries would spread fear and spike interest, which would depress the value of unsold treasuries.  The other consequence for China would be the exchange rate for dollars.  The Chinese Yuan would increase in value in relation to the dollar, reducing their exports.

China manipulates the value of their currency, to promote trade.  They will not let it appreciate, as this would slow exports, and their economy.  China will do what is in their best interests.  They do not buy our treasuries because they like us.  They buy treasuries because they sell us so many widgets, and have money running out of their Naru jackets pockets.

The one way China could reduce their holdings of U.S. Treasuries without throwing the market in a spin is to exchange them for trade.  For example, China is going around the world tying up resources.  They could exchange treasuries to other governments for the drilling rights, or mining rights, or good ol’ payoffs.  China is not limited by our ethics legislation that requires U.S. companies to avoid distasteful governments or business practices.

The FDIC needs to shore up their balance sheet as they have closed 94 banks so far this year, with 416 on the problem bank list as of June 30.  We crunched the numbers last week showing they had gone through 25% of their TOTAL reserve funds in the last 90 days.  The FDIC is required to maintain a reserve equal to 1.15% of insured deposits.  At the end of June, their uncommitted reserve was at 0.22%  The New York Times reports that “FDIC may Borrow from Banks.”  Congress expanded the FDIC’s credit line to $100 billion in May.

There has already been a special assessment on banks this year, and regular premium rates have been increased.  Additional charges to banks may push more onto the “troubled bank list.”  Even a five to ten billion special assessment is not enough.  Remember, the FDIC went through $12.3 billion in the last 90 days.

Camden Fine, President of the Independent Community Bankers said,”Sheila Bair would take bamboo shoots under her nails before going to Treasury for help.”  The bad blood goes to back to Geithner publicly criticizing the FDIC.  Bair is trying to maintain the independence of the FDIC, which should probably be seen as a good thing.  It is ironic that a regulatory agency is going to borrow money from the businesses that they regulate.

“In a bureaucratic system, useless work drives out useful work”—Milton Friedman

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Home Page

Back to Top