I see today that Chinese dollar reserves have now broken below
the 3 trillion dollar level. That may seem like a lot, but it is alarming. As I commented at http://gordon-feil-economics.blogspot.ca/2017/01/china-is-going-broke.html,
the combination of illiquid dollar investments and cushion needed to bail out
the troubled Chinese banking system, reduces the useable reserves to probably
about a trillion. They blew through 800 billion dollars last year, so this
remainder isn’t much.
Chinese export of dollars has ultimately chased U.S.
treasuries. This has had the effect of putting downward pressure on U.S.
interest rates. When there is a demand for treasuries, the price goes up, and
it is the difference between the price paid and the redemption (face) value
that constitutes the effective interest. High buying pressure narrows that gap
and reduces interest earned.
China is losing its ability to export U.S. dollars, and that
means less dollars chasing USA debt, so this would tend to make interest rates
rise. I suspect that the Trump administration will pressure American banks to
use some of their huge reserves to buy that debt though. I also suspect that
China will do a MASSIVE devaluation of the yuan to attract dollars back.
China has problems besides its currency and hemorrhage of
capital. Trouble with its neighbors. Trouble with Trump who is plain spoken and
doesn’t pussy foot around the issues that bother him. A huge debt bubble ready
to pop.
I’ll say it again: China is in major trouble. It looks like
friendly relations with the USA will be ending. Chinese culture does not like
direct embarrassing communications. It wants to save face. Trump isn’t one to play that game. The Chinese may get aggressive to save face. There
may even be military action.
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