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On the Origin of Facts

China Tears Up America’s Credit Cards

by Bruce Henderson

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Government data released for June 2009 shows that China has begun to make good on it’s forecast to start reducing exposure to US government debt. This was not done for ideological or political reasons, as some may claim, but rather because of an honest risk vs. reward assessment and internal forces threatening to tear the rosy veneer from China’s economy.

In February of 2009, The People’s Republic of China (a communist country) once again broadcast to the world that they were growing increasingly uneasy with the amount of US treasuries they were buying and holding. At that point they owned more than $744.2 Billion in US government debt, with additional large holdings of private US debt in the form of corporate bonds. In an article published in Reuters. Luo Ping, director-general at the China Banking Regulatory Commission (a communist), broadcast the increasing discomfort China had with its mounting US debt.

“Except for U.S. Treasuries, what can you hold?” Luo was cited by the paper as saying. “Gold? You don’t hold Japanese government bonds or UK bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option.” In further remarks, Mr. Luo stated, “There will be no bottom-fishing of financial institutions, particularly in the U.S., because there is a lot of uncertainty about the quality of the books,” the paper quoted Luo as saying; “We hate you guys. Once you start issuing $1 trillion-$2 trillion… we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

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Though Mr. Luo is a minor communist functionary (he does not speak for the party) he did telegraph the growing systemic Chinese unease with US fiscal insanity. China has dramatically improved their internal economy in the traditional Asian fashion, through a massive export driven system. In return they have used the long-term imbalance of trade coupled with an artificially low national currency to stockpile huge reserves that the plowed back into debt of the governments of nations they did business with. To China this made common sense, they wanted to help continue to fuel their expansion by recycling their dollars and at the same time show their commitment to their trading partners.

This created huge distortions in world economies, especially in the US where it helped fuel out of control government spending of the Bush era. Once the facade started to crumble in 2007, our Chinese creditors were suddenly left with the realization that the US was not as credit worthy as originally though.

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In fact China is facing multiple huge financial dislocations of its own. In July the government failed to sell all 35 billion yuan in bonds up for sale, achieving only 25.1 billion yuan ($3.7 billion) sold. One could reasonably ask what China, with more than $2 trillion in currency reserves, is doing selling bonds into a market already flooded by the US desperately trying to fund their government bloat.
In truth, the opaque, communist Chinese managed economy is in worse shape than ours. The government has been desperate to put a shining golden face on what is quickly becoming an unmanageable situation. The bond sales in July that failed were part of a fund raising effort for China’s 586 billion multiyear “stimulus package”.

This stimulus is an effort by China to keep businesses running in the face of collapsing global demand for everything China makes, as the bubble economy of the last 10 years unwinds. Though reports are few outside of China, the country has seen waves of protests by workers who find themselves unemployed and forced to return to wretched peasant life in the countryside.

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Though the Chinese state run economy is incredibly opaque, China’s central banks have poured free money into their country. As a result bank lending has surged across China, with the total amount taken out in loan being roughly 7.3 trillion yuan (about $1.1 trillion). By figures released by the Royal Bank of Scotland, this is roughly two years worth of lending under normal circumstances.

Where is this money going? Why, China’s favorite pasttime: gambling. This free money is pouring into China’s stock exchange and into real estate speculation. This is reflected by the dramatic rise in property values in all of China’s major and second tier cities. Like in the US, any scarcity in the market is simply a function of speculators lacking a property to use as an appreciation vehicle; the true market is highly over-saturated in almost every segment.

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In addition, communist China’s state-run industries have gone on a raw material and commodity-buying binge. In the face of imploding demand world wide, China is hoarding basic industrial goods such as steel, oil, aluminum and copper. This has helped pump worldwide commodity prices back towards some of their highs of 2008.
Which brings us back to China’s reduction in US debt holdings. The Chinese government clearly knows the game is nearly done, and is wisely starting to pull back its investments towards home soil. With it’s economy out of control and headed for an implosion; they need to repatriate money to keep some semblance of order once the wheels come off. Like so many households in the US, they are liquidating what they can to cover the costs of life now that the new reality has taken hold.

Will China mass-dump US treasuries when they hit the wall? Some political pundits have spread this thought around in the past, pointing to China as the evil schemer in the east. In reality China will always be the ultimate pragmatists, and may see the money parked in the US as a nest egg that will be used to prime their system once the financial storm has blown over. With China focusing on saving their own skin, days of free money from China are coming to a close.

Bruce Henderson writes for And Still I Persist and is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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