A Confucian conundrum for China

September 9, 2009

The Chinese own more United States Treasury bills than can be counted in a lifetime, and as the dollar printing press roars on, the rulers of the People’s Republic are getting nervous. They would like to see another reserve currency, and quite like the idea of it being the renminbi. After all, the euro and the yen are really too small to fulfill the role, while sterling is just small change.

So China has this week decided to issue its first sovereign bonds denominated in its own currency which foreigners can buy, at least in small amounts. After all, if the world is to hold renminbi reserves, it needs a proper market in its central bank IOUs.

So far, so logical. But there’s something odd here. Buyers of the bonds must first acquire the right currency, which in practice means selling dollars to buy the renminbi. The ultimate buyers of those dollars will be the Chinese, who will then buy yet more US T-bills, making the pile even higher.

International investors will welcome a few Chinese government bonds in a diversified portfolio, but while the vast trade imbalance between China and the US persists, issuing them will do nothing to ease the upward pressure on the renminbi, or to reduce that bill mountain.

3 comments

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At least the Chinese understand the value of money. Ironic ain’t it?

Posted by Dennis | Report as abusive

These guys are sucking the life out of US cash flow, not unlike the Mid East which is depleting the US reserves with bad play.

Posted by Casper | Report as abusive

In the late 80′s a pie chart in the 1040 instruction book caught my attention. Still there, it describes the sources and expenditures of US Treasury funds including taxes. Not surprising was that Defense was the greatest spending portion.

What I found alarming at that time was that almost as large a piece of the pie went to service the public debt. My reasoning held that this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.

This process never did stop, but during the Clinton administration it did slow down considerably. By the time Bush took office, that piece of the pie had been dramatically reduced along with the debt and deficit.

We now know the result of financing 2 wars to pump up that debt and deficit again. The meltdown on Wall Street last fall has by now been embraced by both Bush and Obama as an excuse to raid the treasury on behalf of the companies which caused the problem. Expect the DEBT piece of the US Expenditures pie to eclipse defense in your next 1040 book.

It has recently been reported that many companies receiving TARP have to paid out total bonus money in excess of their earnings. A substantial tax penalty (70% or better?) on these bonuses would net $Billions which could be used to buy back outstanding debt and discourage future feeding frenzies.

The remaining $Trillions in debt can be dispatched by the first rule of holes…”When you find you\’re in one; stop digging.” Or as previously mentioned; this burden would eventually be lifted if the US Treasury would simply STOP selling bonds.

BTW–The replacement for the US Dollar is already in place. Google “Amero” to find out more. The Amero has been minted in Denver since 2006. And you can expect the day to come when your soon-to-be-worthless Dollars can be traded in for them at say 25%?